QUESTION 5 Assume that, without taxes, the consumption schedule for an economy i
ID: 1095955 • Letter: Q
Question
QUESTION 5
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.
Instructions: In the table, enter your answers as whole numbers.
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?
Instructions: Round your answers to 2 decimal places.
MPC for the proportional tax consumption schedule = ?
Multiplier for the proportional tax 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
Explanation / Answer
y=C+I
Y=C+S
C=a+b(Y-tY)
Y = I+a+b(Y-tY)
Y = [a+I]/1-b(1-t)
a=40, b = .8, t=.1
MPC of proportional tax schedule = b(1-t)=.72
Multiplier for propoartional tax = 3.57
GDP, Billions Consumption Before Tax, Billions Tax Rate, Billions Disposable Income, Billions Consumption After Tax, Billions $100 120 $10.0 $90 $112.0 200 200 $20.0 $180 $184.0 300 280 $30.0 $270 $256.0 400 360 $40.0 $360 $328.0 500 440 $50.0 $450 $400.0 600 520 $60.0 $540 $472.0 700 600 $70.0 $630 $544.0Related Questions
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