Taxmania is a closed economy with government. Aggregate demand is described by Y = C +I + G, where C denotes aggregate consumption, I denotes investment and G denotes government expenditure. Disposable income is denoted by Y,; income in Taxmania is taxed at a rate t, while the government can also deduct taxes as a lump sum T. In particular: C = 40 + 0.8YD Yр 3D (1 — t)Y — Т I = 200 – 6r G = 360 t = 0.25 T = 0 (a) Explain briefly what the IS curve represents and find its equation for Taxmania. (b) Find the multiplier for Taxmania and explain its meaning. What does it depend on? (c) The central bank of Taxmania targets the real interest rate and has set r = 4. Use the IS-LM framework to find the level of output in the economy. Show that Taxmania has a balanced budget.

Taxmania is a closed economy with government. Aggregate demand is described by Y = C +I + G, where C denotes aggregate consumption, I denotes investment and G denotes government expenditure. Disposable income is denoted by Y,; income in Taxmania is taxed at a rate t, while the government can also deduct taxes as a lump sum T. In particular: C = 40 + 0.8YD Yр 3D (1 — t)Y — Т I = 200 – 6r G = 360 t = 0.25 T = 0 (a) Explain briefly what the IS curve represents and find its equation for Taxmania. (b) Find the multiplier for Taxmania and explain its meaning. What does it depend on? (c) The central bank of Taxmania targets the real interest rate and has set r = 4. Use the IS-LM framework to find the level of output in the economy. Show that Taxmania has a balanced budget.

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter21: Fiscal Policy

Section: Chapter Questions

Problem 20SQ

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In the country A , autonomous consumption (CA) is 100, marginal propensity to consume (CY) is 0.5, investment expenditure (I) is 50, government spending (G) is 50, lump-sum tax collection (T) is 20 and income tax rate (t) is 0.2. AE = C + I + G According to the information above, fill in the blanks. a) The equilibrium output is: _____________ b) If the lump-sum tax increases to 40, the new equilibrium output is: _______ c) The tax multiplier (numerically) is: ______________
TRUE/FALSE Accordingto Ricardian Equivalence in a strict sense, the tax multiplier is zero.
If the MPC is 0.75, the tax multiplier is Group of answer choices -1.666. -1. -3. -2.5
Suppose the economy is in equilibrium at point B which is below the full-employment output of point D. If the government implements fiscal policy targeted at moving real GDP back to point D, but crowding out significantly reduces the effectiveness of the fiscal policy, the equilibrium point will likely end up closer to point Multiple Choice A B C D
Suppose the government reduces taxes by $20 billion and that there is no crowding-out effect and the MPC is .75 then the total effect of the tax cut on aggregate demand is a) 50 billion b) 60 billion c) 70 billion d) 80 billion
Consider a simple Keynesian model with taxation. Suppose the marginal rate of tax is 0.2 and the marginal propensity to consume is 0.5. Then a decrease in investment expenditure of 100 units will: Group of answer choices None of the other options Increase equilibrium output by approximately 150 units Increase equilibrium output by approximately 167 units Decrease equilibrium output by approximately 150 units
Given the above model for an economy C = 100 + 0.8Yd G = 800 T = 500 I = 200 c)Find Tax multiplier. d)Find the new level of output if the lump-sum tax is increased by 100 (ΔT = 100). f)Find the new level of output if the government spending is increased by 100 and this government expenditure increase is financed by the same amount of increase in lump-sum taxes (ΔG = ΔT = 100).
If the MPC is 0.9, the the government spending multiplier is: a. 0.1 b. 1.11 c.9 d. 10 If the MPC is 0.9, then the tax multiplier is: a. -0.1 b. -1.11 c. -9 d. -10
True or False: Fiscal policy refers to government actions related to taxation and government spending to influence the economy.
As a result of Bush-era tax cuts that partially expired in January 2013, the marginal income tax rates for some households increased and these households paid higher taxes. Which of the following would be the best description of the tax cut expiration? A leftward shift in AS. A rightward shift in AS. A rightward shift in AD. A leftward shift in AD.
The aggregate consumption function is C = 800 + .8Yd. If income is $2,000 and net taxes are $500, consumption equals Group of answer choices 1,500. 2,000. 2,050. 2,150
Assume an MPC of 0.9. The change in total spending for the economy as a result of a $100 billion new government spending injection would be: A) $90 billion B) $80 billion C) $900 billion D) $800 billion