Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the reduction in a fixed tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. 100 90 45-degree line TE with reduction in a fixed tax 70 Total Expenditure 60 50 TE with reduction in a variable tax REAL EXPENDITURE (Billions of dollars) Ng 40 30 50 80 10 0 010 20 20 30 40 50 60 70 80 90 100 Show Transcribed Text REAL GDP (Billions of dollars) Suppose that the government also considered a variable tax cut and that the resulting consumption schedule would have also passed through one black point (plus symbols) on the left and one black point on the right on the first graph (though not necessarily the same points as the consumption schedule resulting from the reduction in a fixed tax). On the first graph, use two purple points (diamond symbol) to connect the two black points (plus symbols) representing the consumption schedule that would result from a reduction in a variable tax. (Hint: As before, the consumption schedule must pass through one point on the left and one point on the right.) On the second graph, use the purple points (diamond symbols) to draw the total expenditure line that would result from a reduction in a variable tax indicated on the top graph. True or False: The change in equilibrium output is greater when the government implements the variable tax cut. ○ True False c Hint: The new consumption schedule must pass through one point on the left and one point on the right. REAL CONSUMER SPENDING (Billions of dollars) 50 30 20 20 10 + + + O +++ + 0 0 20 40 60 REAL GDP (Billions of dollars) + + 80 100 Consumption with Reduction in a Fixed Tax Consumption with Reduction in a Variable Tax ? The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure. Show Transcribed Text Use the new consumption line you just plotted to calculate the new total expenditure at two levels of real GDP and fill in the following table. GDP level Total Expenditure (Billions of dollars) (Billions of dollars) 10 90
Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the reduction in a fixed tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. 100 90 45-degree line TE with reduction in a fixed tax 70 Total Expenditure 60 50 TE with reduction in a variable tax REAL EXPENDITURE (Billions of dollars) Ng 40 30 50 80 10 0 010 20 20 30 40 50 60 70 80 90 100 Show Transcribed Text REAL GDP (Billions of dollars) Suppose that the government also considered a variable tax cut and that the resulting consumption schedule would have also passed through one black point (plus symbols) on the left and one black point on the right on the first graph (though not necessarily the same points as the consumption schedule resulting from the reduction in a fixed tax). On the first graph, use two purple points (diamond symbol) to connect the two black points (plus symbols) representing the consumption schedule that would result from a reduction in a variable tax. (Hint: As before, the consumption schedule must pass through one point on the left and one point on the right.) On the second graph, use the purple points (diamond symbols) to draw the total expenditure line that would result from a reduction in a variable tax indicated on the top graph. True or False: The change in equilibrium output is greater when the government implements the variable tax cut. ○ True False c Hint: The new consumption schedule must pass through one point on the left and one point on the right. REAL CONSUMER SPENDING (Billions of dollars) 50 30 20 20 10 + + + O +++ + 0 0 20 40 60 REAL GDP (Billions of dollars) + + 80 100 Consumption with Reduction in a Fixed Tax Consumption with Reduction in a Variable Tax ? The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure. Show Transcribed Text Use the new consumption line you just plotted to calculate the new total expenditure at two levels of real GDP and fill in the following table. GDP level Total Expenditure (Billions of dollars) (Billions of dollars) 10 90
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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6. Graphical treatment of taxes and fiscal policy .
The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes rise and fall with GDP ∇.
The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a reduction in a fixed tax.
Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes.
Hint: The new consumption schedule must pass through one point on the left and one point on the right.
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