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Income Multiplier Assignment

10 Points (Only if handed in on-time)

(http://faculty.washington.edu/krumme/350/exercises/multiplier.html)

Some Answers!

Modify (in three different ways) the simple Milltown multiplier example used in class (propensity to consume locally = .8; import propensity of local service sector = .75]

1. Change in what is "Exogenous" (or "Basic"):
   Assume the American Textile Co. (ATC = sole customer of Milltown Gray Cloth Corporation [MGCC]) is relocating its plant facilities into our community ( = Milltown). Its input requirements are as follows: for every 1$ of cloth (from our local MGCC plant) to be processed into a final product, it requires 1$ of labor (labor input = 50% or .5). Calculate the new total income, including multiplier effects (assuming the multiplier remains unchanged -- at least in the short-run). ATC's total production value shall be $ 80 mill.

2. Change in the PCL (Propensity to Consume Locally):
   How do (a) the multiplier(s) and (b) the total income change after we account for some remarkable changes occurring in our community. While 40% of ATC's wage bill goes to workers retained and relocated from its former location into our community (Some of these workers are sending part of their pay-ckecks to their families left behind and, as a group, thus have a lower local consumption propensity [pcl=.6] than the existing workers/households), the other 60% go to workers recruited locally and largely consist of formerly unemployed spouses of MGCC workers. The additional income earned by this second-income-household labor force is half saved and half spent locally.

3. Change in the "ICLES" Coefficient ("Import Substitution"):
   After all this has happened, the local service sector "decides" that the additional local income justifies some more local production of locally consumed products (=import substitution). As a result, the service sector "leakage" coefficient declines from .75 to .65 . Calculate the new total income. Establish the coefficient matrix for this new expanded economy.

Please Note:

• Be explicit throughout about
  1. what you are doing and why you are doing it (in your own words!)
  2. assumptions you possibly need to make (e.g. in part "2")!

• Please submit this assignment: on paper (with the OPTIONAL possibility to move it to your Webpage later. Thanks!