Consider the city of New Heaven, which is a very open economy. The city exports reliquaries and has no investment or taxes. The city's residents consume 50 percent of their disposable incomes, and 90 perce of all purchases are imports from the rest of the country. The mayor proposes levying a tax of $100 million to spend on a public-works program. Mayor Cains argues that output and incomes in the city will rise nicely because of something called "the multiplier."
Estimate the impact of the public-works program on the incomes and output of New Heaven. Do you agree with the mayor's assessment?