QUESTION 6 Assume that, without taxes, the consumption schedule for an economy i

Question

QUESTION 6

Assume that, without taxes, the consumption schedule for an economy is as shown in the table below. Impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200, 10 percent at $300, 15 percent at $400, and so forth. Determine the new consumption schedule, noting the effect of this tax system on the MPC (tax inclusive) and the multiplier.

Instructions: In the table below, enter your answers (except the MPC) as whole numbers. For the MPC, round your answers to 2 decimal places.

GDP, Billions

Consumption Before Tax, Billions

Tax, Billions

Disposable Income, Billions

Consumption After Tax, Billions

Tax Rate, Percent

MPC

100

120

null

200

200

300

280

400

360

500

440

600

520

700

600

Explanation / Answer

C= a+b(Y-T)

MPC after tax= dC/dY

GDP, Billions Consumption Before Tax, Billions TAX Disposable Income, Billions Consumption After Tax, Billions Tax Rate, Billions MPC $100 120 $0 $100 $120.0 0 200 200 $10 $190 $192.0 5 0.72 300 280 $30 $270 $256.0 10 0.64 400 360 $60 $340 $312.0 15 0.56 500 440 $100 $400 $360.0 20 0.48 600 520 $150 $450 $400.0 25 0.4 700 600 $210 $490 $432.0 30 0.32

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