Economics: Principles & Policy
14th Edition
ISBN: 9781337912679
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning US
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Question
Chapter 24, Problem 5DQ
To determine
The consumption function and tax cut.
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Suppose the following list of events describes all of the economic activity resulting from an increase in government spending.
Suppose that at each step after the initial one, the marginal propensity to consume is 0.62 and the tax rate is 8%.
Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats.
Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his
daughter.
Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful
candlesticks as gifts for all of her friends.
Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to
improve his house.
Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to
answer the following questions. Round answers to the nearest cent, if necessary.
How much does…
Suppose the following list of events describes all of the economic activity resulting from an increase in government spending.
Suppose that at each step after the initial one, the marginal propensity to consume is 0.67 and the tax rate is 16%.
Step 0. The government spends $8500 on meat to host a very large dinner for foreign diplomats.
Step A. The butcher takes the income earned by selling the meat, saves some, and spends the rest on a wedding cake for his
daughter.
Step B. The baker who produced the wedding cake saves some of her earnings and uses the rest to purchase beautiful
candlesticks as gifts for all of her friends.
Step C. The local candlestick maker saves some of his revenue for retirement and spends the rest on building materials to
improve his house.
Instructions: Modify the settings in the interactive tool to represent this event. Then click "Spending Rounds" and use the table to
answer the following questions. Round answers to the nearest cent, if necessary.
How much…
Logically discuss the impact of the increase in government taxes on consumption.
Chapter 24 Solutions
Economics: Principles & Policy
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