Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 24.A, Problem 1P
To determine
The case in which tax revenues depend on income.
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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?
1. Suppose the MPC is .90 and the MPI is .10. if government expenditure goes up $100 billion while taxes fall $10 billion, what happen to the equilibrium level of real GDP?
Use following equations for exercise 2-4
C= $100 + .8Y
I=$200
G= $250
X = $100 - .2Y
2. What is the equilibrium level of real GDP?
3. What is the new equilibrium level of real GDP if government spending increases by $150?
4. What is the new equilibrium level of real GDP if government spending and taxes both increase by $150?
5. Make a graph showing the spending and tax revenue of your state government for as many years as you can find (use the government of your home country if you are not from the United States). What trends do you notice? What spending categories make up the largest share of the state budget? What are the largest sources of revenue?
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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Chapter 24 Solutions
Principles of Economics (12th Edition)
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Similar questions
- Explain the difference between the government purchases multiplier and the net tax multiplier. If the MPC falls, what happens to the tax multiplier?arrow_forwardSuppose the consumption function is given by C(Y) = 50+0.5 (Y-T), where Y represents income and T represents net taxes. Suppose that the level of government expenditure, G, is 200; net taxes, T, are 200; planned investment, I, is 400. 1)The government expenditure multiplier is: a. -2 b. -1 c. 2 d. 1 The equilibrium level of output is: a. 850 b. 1500 c. 900 d. 1100arrow_forwardConsider the following economy: C = 300 + 0.8 (Y – T) I = $300 G = $200 and T = $250 What is the equilibrium level of national income? What is the change in national income, if only government spending increases by $10? What is the government spending multiplier? What is the change in national income, if only taxes increase by $10? What is the tax multiplier? Based on (b) and (c), does the balanced budget multiplier theorem hold? What is the change in national income, if both government spending and taxes increase by $10 each?arrow_forward
- Suppose that the government decreases its autonomous spending by $100 billion and also decreases its autonomous taxes by $100 billion. How would this affect the economy? Question 8 options: No effect on the level of GDP GDP may rise or fall depending on the size of the mpc GDP will rise GDP will fallarrow_forwardConsider an economy described by the following equations: Y=C+I+G C=100+.75(Y−T)C=100+.75(Y−T) I=500−50rI=500−50r G=125G=125 T=100T=100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Questions: d. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output. e. In this case, explain the policy that was used by the policymaker to target the aggregate demand.arrow_forward1. Consider an economy with the initial equilibrium income level of $1000 and the consumption function of C = $150 + 0.6 (Y - T). Find the following quantities:a. Government expenditures at the equilibrium level of income if T = $160 and I = $100.b. The change in income produced by increasing taxes 10%, provided that G and I remain unchanged. What is the tax multiplier?c. The change in income produced by increasing government expenditures 10%, provided that T and I remain unchanged. What is the government spending multiplier?d. Based on your answers to (b) and (c), does the balanced budget multiplier theorem hold?arrow_forward
- Assume that, without taxes, the consumption schedule for an economy is as shown in the first two columns of the table below. Suppose that a lump-sum (regressive) tax of $10 billion is imposed at all levels of GDP. a. Calculate the tax rate at each level of GDP and enter the tax, disposable income, consumption, and tax rate in the table.Instructions: For the tax, disposable income, and consumption after tax, enter your answers as whole numbers. For the tax rate, round your answers to 2 decimal places.SEE PICTURE!!! b. Compare the MPC and the multiplier with those of the pretax consumption schedule. Instructions: For the MPC, round your answers to 1 decimal place. For the multiplier, enter your answers as whole numbers. SEE PICTURE!!!arrow_forwardUse 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_forward
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