Tax policy is one used not only for economic purposes but also for political purposes. It is the opinion of many in congress and the current president that the rich should pay more of their income in taxes, and that the resulting fairness from this rise in taxes will lead to more economic growth and a rise in employment. Using the simple expenditure model (Y and Ep, not IS-LM, not AS-AD) answer these two questions: One, would a lump-sum tax increase on many high-income households cause GDP to rise in the short run as predicted by the politicians? Why or why not? And two, are there macroeconomic conditions involving Y and Ye in this simple expenditure model under which such a tax increase would be fully warranted? Draw the graphs and explain the outcomes for both cases.

Tax policy is one used not only for economic purposes but also for political purposes. It is the opinion of many in congress and the current president that the rich should pay more of their income in taxes, and that the resulting fairness from this rise in taxes will lead to more economic growth and a rise in employment. Using the simple expenditure model (Y and Ep, not IS-LM, not AS-AD) answer these two questions: One, would a lump-sum tax increase on many high-income households cause GDP to rise in the short run as predicted by the politicians? Why or why not? And two, are there macroeconomic conditions involving Y and Ye in this simple expenditure model under which such a tax increase would be fully warranted? Draw the graphs and explain the outcomes for both cases.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter21: Fiscal Policy

Section: Chapter Questions

Problem 19SQ

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