Assume that, without taxes, the consumption schedule of an economy is as follows:
GDP, Billions
Consumption, Billions
$0
$40
100
120
200
200
300
280
400
360
500
440
600
520
700
600
a. What is the value of the MPC? _______
b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Add the after-tax consumption to the table below.
GDP, Billions
Consumption, before tax
Lump-sum tax
Consumption, After tax
$0
$40
$10
100
120
10
200
200
10
300
280
10
400
360
10
500
440
10
600
520
10
700
600
10
Compare the MPC and the multiplier with those of the pretax consumption schedule.
Instructions: Round your answers to 1 decimal place.
MPC after tax = ______ ?
Multiplier after tax = ______ ?
The MPC and multiplier are: higher before the tax OR higher after the tax OR the same before and after the tax ?
Assume that, without taxes, the consumption schedule of an economy is as follows:
| GDP, Billions | Consumption, Billions |
| $0 | $40 |
| 100 | 120 |
| 200 | 200 |
| 300 | 280 |
| 400 | 360 |
| 500 | 440 |
| 600 | 520 |
| 700 | 600 |
a. What is the value of the MPC? _______
b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Add the after-tax consumption to the table below.
| GDP, Billions | Consumption, before tax | Lump-sum tax | Consumption, After tax |
| $0 | $40 | $10 | |
| 100 | 120 | 10 | |
| 200 | 200 | 10 | |
| 300 | 280 | 10 | |
| 400 | 360 | 10 | |
| 500 | 440 | 10 | |
| 600 | 520 | 10 | |
| 700 | 600 | 10 |
Compare the MPC and the multiplier with those of the pretax consumption schedule.
Instructions: Round your answers to 1 decimal place.
MPC after tax = ______ ?
Multiplier after tax = ______ ?
The MPC and multiplier are: higher before the tax OR higher after the tax OR the same before and after the tax ?
Related textbook solutions
Related questions
1) Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the unemployment rate?
2) If the CPI was 110 last year and is 121 this year, what is this yearâs rate of inflation? In contrast, suppose that the CPI was 110 last year and 108 this year. What is this yearâs rate of inflation? What term do economics use to describe this second outcome?
3) Use the hypothetical economy data in the table below to answer the following questions.
| Amount of Real GDP Demand, in Billions | Price Level (Price Index) | Amount of Real GDP Supplied, in Billions |
| $180 | 300 | $500 |
| 260 | 250 | 400 |
| 300 | 200 | 300 |
| 420 | 150 | 200 |
| 560 | 100 | 100 |
â¨
a) What is the equilibrium price level and the equilibrium level of real output in this hypothetical economy? Use Excel to graph both the aggregate demand and aggregate supply curves. Can there be equilibrium level of output at below full employment?
b) At what price level will aggregate supply FALL BELOW [equal] aggregate demand? At what price level will demand fall below aggregate supply? If given a price level of 250, will aggregate demand exceed supply?
c) If the aggregate demand schedule shifted by $140 billion to the right at every level, what would be the new equilibrium level of income?
| 10. | The long-run aggregate supply curve (LRAS) is Y = Yf, which depends on the amounts of resources and the level of technology innovation. If a country has more resources and better technology, which of the following is true? | ||||||||||||||||
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| 11. | Suppose the wage rates of workers are based on the expected price level. If there is an unexpected increase in AD, it will cause the actual price level to increase. Then workers should raise their expected price level and negotiate a higher wage rate. Then which of the following is most likely to be true when the expected price increases? | ||||||||||||||||
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| 12. | Suppose the economy is in the long-run equilibrium, i.e., Y = Yf, and there is an unexpected decrease in AD. Assume that Yf is fixed, then which of the following is most likely to be true? | ||||||||||||||||
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| 13. | The short-run (SR) equilibrium is the intersection between AD and SRAS, and long-run (LR) equilibrium is the intersection between AD and LRAS. Every LR equilibrium is a SR equilibrium, but a SR equilibrium is not always the LR equilibrium. If an economy is operating at a SR equilibrium where Y > Yf, which of the following will occur in the process toward the new LR equilibrium when the economy corrects itself? | ||||||||||||||||
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| 14. | From the Keynesians, Y = C + I + G + NX can be transformed into a theoretical model. In particular, assume that the consumption C = A + mpc (Y-T), where A is a constant, mpc is the marginal propensity to consume, Y is national income and T is income taxes. Suppose in the goods market equilibrium, aggregate expenditure = national income such that the two Y's will be the same from Y = A + mpc (Y-T) + I + G+ NX. . Suppose C = 400 + 0.75(Y â T). G = 100, I = 100, T = 100, and NX = 150, what is the Y in the goods market equilibrium? (All of the variables are in terms of million dollars) | ||
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| 15. | Continue to assume that C = 400 + 0.75 (Y - 100), I = 100, and NX = 150. But the government now increases spending from 100 to 200, how much is the new Y in the goods market equilibrium? | ||||||||||||||||
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| 16. | Continue to assume that C = 400 + 0.75 (Y - 100). Then which of the following is true? | ||||||||||||||||
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| 17. | Suppose the federal government needs to balance the budget, which means that when the government spending increases, taxes must increase equally. In this case, government spending multiplier is called the balanced-budget multiplier, defined as the increase in real GDP/increase in government spending. By following the example from the previous question, how mcuh is the balanced-budget multiplier? | ||||||||||||||||
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