If taxes increase by $500 and the MPC is 0.8, what is the change in consumption and private savings? What is the change in public savings? what is the change in total savings? What is the change in investment?

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Darryn D'SouzaLv10

28 Sep 2019

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Suppose the government is considering a tax policy that will reduce taxes by $100. In the economy, households consume 80% of each additional dollar earned. Assume that the tax cut doesn't affect GDP (Y).

a) How will this tax affect consumption?

b) Calculate the change in private savings.

c) Calculate the change in government savings and national savings.

d) What will happen to the current account as a result of this policy?

e) How would your previous answers change if we assume Ricardian equivalence?

copperhare643

Suppose the government is considering a tax policy that will reduce taxes by $100. In the economy, household consume 80% of each additional dollar earned. Assume that the tax cut has no effect on GDP (Y)

(a) How will this tax affect consumption?
(b) Calculate the change in private savings.
(c) Calculate the change in government savings and national savings
(d) What will happen to the current account as a result of this policy?
(e) How would your previous answers change if we assume Ricardian equivalence?

blackdog558

National savings is equal to the sum of private savings and public savings. To make our notation a bit easier, we will call national savings S, private savings V, and public savings U. So in other words,

S = V + U.

If private savings 'V' = 0.75S and total savings 'S' equals $4.20 billion, solve for public and private savings.

Public savings: $ billion

Private savings: $ billion