Question

Consider a small country that is closed to trade, so its net exports are equal to zero. The following equations describe the economy of this country in billions of dollars, where C is consumption, DI is disposable income, I is investment, and G is government purchases:
C = 30+0.6 X DI

G = 120

I = 70

Assume that this economy initially has a fixed tax and that net taxes (taxes minus transfer payments) are $100 billion. Disposable income is then Consider a small country that is closed to trade, , where Y is real GDP. Aggregate output demanded is __________- .

Suppose the government decides to increase spending by $10 billion without raising taxes. Because the expenditure multiplier is_______ , this will increase the economy's aggregate output demanded by__________ .

Now suppose that the government switches to an income tax, which is a type of variable tax, of 25%. Because consumers retain only 75% of each additional dollar of income, disposable income is now . In this case, the economy's aggregate output demanded is________ .

Given an income tax of 25%, the expenditure multiplier is approximately . Therefore, if the government decides to increase spending by $10 billion without raising tax rates, this would increase the economy's aggregate output demanded by approximately__________ .

A $10 billion increase in government purchases will have a larger effect on output under a__________ (Answer one of these two??Variable tax of 25% or is it a fixed tax of 100 Billion) .

Answer 1

Answer:

Y = 300

government multiplier 2

output demanded increase by 20

If income tax is applied:

Y = 272.72

multipliers: 2.253775

increase 22.53775 billons

As disclosure it has a larget effect when the income tax is levied based on income rather than a flat rate.

Explanation:

DI = Y - 100

C = 30 + 0.6(Y - 100)

C = 30 - 60 + 0.6Y

C = 0.6Y - 30

Y = C + G + I

Y = (0.6Y -30) + 120 + 30

Y = 120 / 0.4 = 300

C = (0.6)300 - 30 = 150

With C we solve for the multiplier:

150/300 = 0.5

1 / (1 - 0.5) = 2

10 x 2 = 20

If variable that:

C = 30 + 0.6 (0.75Y)

C = 30 + 0.45Y

Y = 0.45Y + 120 + 30

Y = 150/.55 = 272,72

C = 30 + 0.45Y = 152,72

Propensitivity to consume:

152.72/272.72 = 0,5563

multiplier:

1 (1 - PMC) = 2.253775073

10 nillon will icnrease x 2.25377 = 22.54 billons