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Assume that, without taxes, the consumption schedule for an economy is as shown in the first two columns of the table below. The MPC without taxes is 0.8. Suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax.

a. Calculate the new consumption schedule.

GDP, Billions

Consumption Before Tax, Billions

Tax Rate, Billions

Disposable Income, Billions

Consumption After Tax, Billions

$100

120

      

200

200

      

300

280

      

400

360

      

500

440

      

600

520

      

700

600

      

b. What are the MPC (tax inclusive) and the multiplier?

MPC for the proportional tax consumption schedule is ________.

The multiplier for the proportional tax consumption schedule is ________.

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Yusra Anees
Yusra AneesLv10
28 Sep 2019

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Related questions

In the country of Utopia, the structure of the economy is described as the following:

Y = C + I + G + (X – M)

C = C0 + (mpc)(DI)

I = I0 + (mpi)(Y)

M = M0 + (mpm)(DI)

DI = Y – T

T = (t)(Y)

Where Y is the level of real GDP in the economy, DI denotes the disposable income in the economy, C represents the level of consumption in the economy, C0 is the autonomous consumption level, mpc denotes the marginal propensity to consume, I is the level of investment in the economy, I0 characterizes the autonomous investment, mpi is the marginal propensity to invest, G characterizes the level of government expenditure, X is the level of export from the country, M represents the amount of import in the country, M0 is the level of autonomous import, mpm denotes the marginal propensity to import, T is the amount of tax imposed in the country, and t represents the average tax rate in the economy.

After extensive research, the economists in Utopia believe that the following values (all the dollar values are in number of millions) can be assigned to the structure of the economy, C0 = $500; mpc = 0.8; I0 = $200; mpi = 0.2; G = $400; X = $300; M0 = $100; mpm = 0.1; and t = 0.25. The Utopian economists further believe that the level of potential GDP in the country is $4,000.

Questions:

1. What is the demand side equilibrium level of real GDP in the country? Please show your calculations.

2. Is the overall Utopian economy in equilibrium? Elaborate your answer.

3. If the economy is not in equilibrium, what will happen eventually? Explain your answer.

4. What is the value of the overall multiplier? Please show your calculations and explain the value.

The country of Utopia is probably experiencing a recessionary pressure in its economy now. The economists are suspecting that, since the latest estimates of mpc, mpi, and mpm indicate that their estimated values have gone down to 0.65, 0.15, and 0.05 respectively.

5. What is the demand side equilibrium level of real GDP in the country now? Please show your calculations.

6. Is the overall Utopian economy now in equilibrium? Elaborate your answer.

7. If the economy is not in equilibrium now, what will happen eventually? Explain your answer.

8. What is the adjusted value of the overall multiplier? Please show your calculations and explain the value.

Use the data from the table below to answer the following questions. Assume all exports and imports remain constant at each level of real GDP and all figures are in billions.

Real GDP = DI

Closed Economy AE = C +I

Imports

Exports

Net Exports (NX)

Open Economy AE = C+I+NX

$200

$240

$30

$20

    

250

280

$30

$20

    

300

320

$30

$20

    

350

360

$30

$20

    

400

400

$30

$20

    

450

440

$30

$20

    

500

480

$30

$20

    

550

520

$30

$20

    

a. Fill in the rest of the table.
b. What is equilibrium GDP for the closed economy?
c. What is equilibrium GDP for the open economy?
d. Why are your answers for part b and part c different?
e. Suppose the United States plans to increase government spending by $20 billion at each level of GDP. What is the equilibrium GDP for this public open economy? Why has equilibrium GDP changed?

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