EBK ECONOMICS: PRINCIPLES AND POLICY
13th Edition
ISBN: 9781305465626
Author: Blinder
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 28, Problem 3TY
To determine
Find the new equilibrium when consumer spending continues to be exactly three-quarters of disposable income.
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Imagine this economy has a 10% tax on income.
The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
Now we have to take that tax into account. Here is a way to think about it:
Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income.
With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1.
Let's define disposable income as Yd where Yd = Y*(1-t).
Therefore we restate our consumption function as C = k + cYd
Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y.
Now what is the equilibrium GDP?
Give the answer to ONE decimal place.
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?
Consider the hypothetical country of Kejimkujik. Suppose that national income in Kejimkujik is $300 billion, households pay $100 billion in taxes, household consumption is equal to $160 billion, and the marginal propensity to consume (MPC) is 0.6.
On the following graph, use the blue line (circle symbol) to plot the economy's consumption function.
Consumption Function050100150200250300350400450500500450400350300250200150100500CONSUMPTION (Billions of dollars)DISPOSABLE INCOME (Billions of dollars)
Suppose now that Kejimkujik’s national income increases to $330 billion. Assuming the amount paid in taxes is fixed at $100 billion and that MPC = 0.6, what is the new amount of household consumption?
$148 billion
$219.4 billion
$220.6 billion
$178 billion
Chapter 28 Solutions
EBK ECONOMICS: PRINCIPLES AND POLICY
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