And on the answer sheet it states that the spending multiplier is:
Now how come that the spending multiplier is 1/0.4? Where are they getting the 0.4, which should be 1-c1-d1 from the original equations?
A friend told me that the 1/0.4 is derived from 1/1-c1(1-t)
then 1/1-0.8(0.75)= 1/0.4. He said that since there is no d1 in the equations ( in the investment equation) we don't use it.
Can somebody explain the meaning behind this 1/0.4) Thanks!