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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V1
Consider the following information for a country:
Consumption function: C = 85+0.8Yd
Investment function: l = 85
Government spending: G=60
Net taxes: T = -40+0.25Y
Disposable Income: Yd = Y - T
Equilibrium: Y = C + l + G
The level of equilibrium income, Y, = $_____(Enter response rounded two decimal places)
The government collects net taxes of $_____
Remember the budget surplus is equal to taxes minus government spending,
The governments budget surplus is $____
Problem 1. The following specifications are given for an economy:
Consumption, C = 250 + 0.75 Yawhere Y, is disposable income
Government expenditure
G
150
Investment
I = 80
Taxes
T
200
(i) Find the equilibrium level of income (Y), Consumption (C) and Private Sector Saving (S)
(ii) Using the value of tax multiplier, how much will income increase if taxes are reduced
by 30 ?
4. In the economy of St. Maynard Island, autonomous
consumption expenditure is $185 million, and the
marginal propensity to consume is 0.75. Investment is
$150 million, government expenditure is $100 million,
and net taxes are $80 million. Investment, government
expenditure, and taxes are constant - they do not vary
with income. The island does not trade with the rest of
the world.
a) What is the consumption function?
b) What is the aggregate expenditure function?
c) What is the island's autonomous aggregate
expenditure?
d) What is the size of the multiplier in St. Maynard Island's
economy?
e) What is the island's aggregate planned expenditure and
what is happening to inventories when real GDP is
$1,100 million?
f) What is the economy's equilibrium aggregate
expenditure?
Chapter 24 Solutions
Principles of Economics (12th Edition)
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- Problem Given the following information about the economy of a country. Consumption function C = 85 + 0.5 Ya Investment function Government spending I = 85 G = 60 Net Taces T = 40 + 0.25 Y (i) Solve for equilibrium income and consumption. (ii) How much does the government collect in net taxes when the economy is in equilibrium ? (iii) What is the government's budget deficit or surplus?arrow_forward4. In the economy of St. Maynard Island, autonomous consumption expenditure is $185 million, and the marginal propensity to consume is 0.75. Investment is $150 million, government expenditure is $100 million, and net taxes are $80 million. Investment, government expenditure, and taxes are constant - they do not vary with income. The island does not trade with the rest of the world. a) What is the consumption function?arrow_forwardProblem 2. You are given the following data for an economy: Consumption C = 20 + 0.8 Y, Investment I = 50 Government expenditure G = 20 Taxes T = 10 Find (a) equilibrium level of income. (b) If lump sum taxes increase by 10, (i) what is the equilihrium level of income, and (ii) lump sum tax multiplier ? (c) If government expenditure decreases by 10, what is (i) equilibrium level of income, (ii) Government expenditure multiplier ?arrow_forward
- C = 450 + 0.4YI = 350G = 150X = 70Z = 35 + 0.1YT = 0.15YYf = 1550(Hint: use the multiplier method)Q.2.4 Calculate the tax revenue to the government of this country when the economyremains in equilibrium.Q.2.5 Calculate what the new equilibrium income should be if the government of thiscountry decides to cancel all taxes, implying the tax rate would now be 0%.Q.2.6 Before the government decreased the tax rate, how much of governmentspending was required to bring the economy to full employment?arrow_forward1. Suppose the households in a hypothetical economy has the following consumption function C= a + cYd. Where is the disposable income. The government in this economy imposes a tax rate of to households’ income (ex. A means that 10% of households’ income goes to tax payments). a. What is the equation that describes the disposable income of households? b. What is the Planned Expenditure Equation? Assume that government expenditure is exogenous and Investment function is given by the equation I = I-br Where is the interest rate. c. Derive the equilibrium output in the goods market and show that the multiplier in this model is 1/1c(1-t). d. How does and the tax rate affects this multiplier (e.g., what happens to multiplier if c increases cet.par. , or if tax rate increases, cet.par)?arrow_forward5. Algebra of the income-expenditure model Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, / is investment, G is government purchases, and T is for net taxes: C 40+0.5x (Y-T) Suppose G $265 billion, 7- $50 billion, and T $10 billion. Given the consumption function and the fact that, in a closed economy, total expenditure can be calculated as Y = C+I+G, the equilibrium output level is s billion. Suppose the government purchases are reduced by $100 billion. The new equilibrium level of output will be equal to s billion. Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal toarrow_forward
- 17. Suppose MPC = 0.6, and G increases by $350 and Tax increases by $350 simultaneously. How much would GDP change? (NOTE: Refer to your answers from #14 & #15) 18. Suppose MPC = 0.8, and the government intends to increase GDP by $300. To achieve the goal, tax must (increase decrease ) by $arrow_forward8. The income-expenditure model Consider a small economy that is closed to trade, so its net exports are equal to zero. Suppose that the economy has the following consumption function, where C is consumption, Y is real GDP, I is investment, G is government purchases, and T stands for net taxes: C = 15+0.75 x (Y-T) Suppose G = $90 billion, 1 = $60 billion, and T = $20 billion. Given the consumption function and the fact that for a closed economy total expenditure can be calculated as Y=C+I+G, the equilibrium output level is equal to 5 billion. Suppose the government purchases are increased by $50 billion. The new equilibrium level of output will be equal to Based on the effect of the change in government purchases on equilibrium output, you can tell that this economy's spending multiplier is equal toarrow_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
- Assume that the economy can be modeled as follows: AE = C + I + G C = 300 + .6Yd I = 400 G = 100 T = 200 Y=1700 consumption=1200 7) Imagine the government would like to increase equilibrium GDP to 2,000, what would it have to set the level of government spending to? 8) What is the size of the spending multiplier? 9) What is the size of the tax multiplier?arrow_forward9. Using the expenditure approach, government expenditures include a) defense and nondefense federal, state, and local government expenditures. b) only nondefense federal government expenditures. c) federal government expenditures and transfer payments. d) only state and local government expenditures. e) residential investment and state and local government expenditures.arrow_forward不 Fill in the missing values in the following table. Assume that the value of the MPC does not change as real GDP changes and that there are zero taxes. (Enter all values as whole numbers.) Real GDP () Consumption (C) Planned Investment (/) Government Purchases (G) Net Exports (NX) $15,000 $10,500 $1,500 $1,300 - $375 $16,000 $11,200 $1,500 1,300 - $375 $17,000 $1,500 1,300 - $375 $18,000 $1,500 1,300 - $375 $19,000 $ $1,500 1,300 - $375arrow_forward
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