Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134079271
Author: CASE
Publisher: PEARSON
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Chapter 24, Problem 2.2P
To determine
Pros and cons of tax cut.
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Suppose that the government of Ansonia is experiencing a large budget deficit with fixed government expenditures of G=250 and fixed taxes of T=150. Assume that consumers of Ansonia behave as described in the following consumption function:
C=300+0.8(Y−T)
Suppose further that investment spending is fixed at 200. Calculate the equilibrium level of GDP in Ansonia. Solve for equilibrium levels of Y, C, and S. Next, assume that the Republican Congress in Ansonia succeeds in reducing taxes by 30 to a new fixed level of 120. Recalculate the equilibrium level of GDP using the tax multiplier. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked. What arguments are likely to be used in support of such a tax cut? What arguments might be used to oppose such a tax cut?
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Consider an economy described by the following equations:
C = 300 + 0.90 (Y – T) (Consumption)
I = $200 (Investment)
G = $300 (Government spending)
T = $200 (Taxes)
Determine the equilibrium level of national income.
Suppose government spending increases to $400. What is the new level of income?
What is the government spending multiplier?
Suppose taxes increase to $300. What is the new level of income?
What is the government tax multiplier?
Based on your answers to (b) and (c), does the balanced budget multiplier theorem hold?
Suppose that autonomous consumption (a) is 300, private investment spending (I) is 420, government spending (G) is 400, Net taxes (T) are 400 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 %. By using the above information:
Find the equilibrium value of national income and show it on a graph
Chapter 24 Solutions
Principles of Economics (12th Edition)
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- Use the following information to answer questions 1, 2, and 3. Suppose that the government of Uplandia is experiencing a large budget deficit with fixed government expenditures of G=375 and fixed taxes of T= 225. Assume that consumers of Uplandia behave as described in the following consumption function: C = 450 + 0.96 (Y - T) Suppose further that investment spending is fixed at 300. 1. Calculate the equilibrium level of GDP in Uplandia. Solve for equilibrium levels of Y, C, and S. 2. Next, assume that the National Congress in Uplandia succeeds in reducing taxes by 89 to a new fixed level of 136. Recalculate the equilibrium level of GDP using the tax multiplier. 3. Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked.arrow_forwardSuppose that autonomous consumption (a) is 300, private investment spending(I) is 420, government spending (G) is 400 , Net taxes (T) are 400 and marginal propensity to consume (b) is 80 %, and marginal tax rate (t) is 25 % . By using the above information Find the equilibrium value of national incomeand show it on a graph.arrow_forwardConsider the income-expenditure identity in the closed economy of Macroland, Y = C + I + G. Suppose consumption is always a fraction MPC of income, C = MPCX Y a. Show that income Y is equal to (I + G) / (1 - MPC). b. Suppose that the citizens of Macroland spend 80% of their income and save 20%. Suppose that in equilibrium, government expenditures in Macroland are $50 billion, and investment is $60 billion. Calculate the level of income/expenditure in Macroland. c. Suppose that the Department of Macrolandian Economic Expansion wants to increase income/expenditure by $100 billion. By how much should it increase government expenditures to achieve this? d. Is the amount you answered for part c. less than, equal, to, or greater than $100 billion? Explain why this is the case.arrow_forward
- Suppose that the consumer’s consumption demand function is given by Cd(r) = 0.8(Y−T)+10−10r. Investment is Id(r) = 20 − 10r, government expenditure is G = 10, and tax is T = 10. The output supply is given by Ys(r) = 100 + 100r. Derive the output demand curve. What is the equilibrium GDP (income) and interest rate? Suppose that government expenditure increases by 10 units while tax also increases by 10 units. How will GDP change? What is the multiplier?arrow_forwardConsider an economy in which the marginal propensity to consume is 0.75, prices are constant, G is initially 1,500, taxes are autonomous (not related to income) and are initially 2,000, transfer payments are initially 500, and GDP is initially 8,200. The economy is currently experiencing an inflationary gap. The government wishes to eliminate the gap and intends to reduce GDP to 7,000, and is considering changing government purchases, or taxes, or transfer payments. What new levels of these fiscal policy tools would be needed? In each case, what would the new government surplus or deficit be?arrow_forward
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