Macroeconomics
10th Edition
ISBN: 9781319105990
Author: Mankiw, N. Gregory.
Publisher: Worth Publishers,
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Question
Chapter 11, Problem 3PA
(a)
To determine
Explain how the tax system changes the way consumption responds to changes in GDP.
(b)
To determine
The changes in the government purchases multiplier due to this tax system.
(c)
To determine
Explain how does this tax system modify the slope of the IS curve.
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Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let’s represent the tax system by writing tax revenue as
T = T− + tY,
where T− and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t × $1.
1.How does this tax system change the way consumption responds to changes in GDP?
2. Im the Keynesian cross, how does this tax system alter the government purchases multiplier?
3. In the IS–LM model, how does this tax system alter the slope of the IS curve?
(solve all three tasks)
Two identical countries, Country A and Country B, can each be described by a Keynesian-cross model. The MPC is 0.6 in each country. Country A decides to increase government spending by $2 billion, while Country B decides to cut taxes by $2 billion. In which country will the new equilibrium level of income be greater? Show all computations.
Suppose policymakers decide to reduce the budget deficit by cutting government spending. Use the Keynesian Cross model to illustrate graphically the impact of a reduction in government purchases on the equilibrium level of income. Be sure to label: (a) the axes, (b) the curves, (c) the initial equilibrium values, (d) the direction the curve shifts, and (e) the final equilibrium values. Explain in words what happens to equilibrium income as a result of the cut in government spending. (100 words max)
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- According to Keynesian economics, what impact would a balanced budget amendment to the constitution requiring the federal government to balance its budget annually have on the economy?arrow_forwardIf the consumer function has the form C = 100 + 0.8 (Y-T), where T is the level of lump-sum taxes, then in a simple Keynesian model, when government spending changes by 10 million, IS will shift by:arrow_forwardAccording to Keynesian economics, which of the following is effective fiscal policy when there is a problem of unemployment?a) reduce market prices.b) increase government purchasesc) doubling the money supply.d) reduce interest rates significantly.arrow_forward
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