00:01
So here we're having a discussion about multipliers.
00:02
We're told that the marginal propensity to consume is 0 .75.
00:08
And now we want to increase government spending by reducing taxes, right? so taxes are going to go, sorry, taxes are going to go down, and we want output to go up.
00:20
So let's think about the process by which this happens.
00:25
So in step one, let's say the government is going to reduce taxes, by say minus x now y is equal to c plus i plus g plus nx which is sort of strange because we don't see taxes in there but what happens is that taxes affect the money available for consumption through the mpc right if taxes go down by some amount it is like people have more income with which they can consume so tax is going down by x increase disposable income by x and an increase in disposable income by x means that consumption is going to increase by x times the marginal propensity to consume.
01:17
So households get x dollars back in taxes and they consume mpc of it.
01:22
So consumption increases income.
01:25
So we have income is going to go up by x times mpc but now when people are richer, they use some of that income to consume more and we get this multiplier cycle starting to happen, right? government cuts taxes.
01:41
People are richer.
01:42
They spend more.
01:42
That means local businesses have more money.
01:44
They spend more...