Consider a closed economy in which there are two groups of houscholds: the richand the poor. The poor earm only wages and the rich earn the rest of the national income.Suppose that the income earned by the two groups are Y (for the rich) and Y, (for the poor), so8.that Y=Y + Y Suppose that the poor consume most of their income, while the rich save mostof their income. Now recall that we define taxes, T, as net of transfers. In other words, T-TaxesTransfer Payments. Suppose that the government increases transfer payments to low-incomehouseholds, paid by an increase in taxes on the high-income households. How does this policyaffect equilibrium output? Discuss the intuition and explain using the Keynesian-Crossdiagram.!!

In the Keynesian cross, the expenditure in an economy decides level of the output or employments.…

Answered: Consider a closed economy in which…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. Suppose the governments of two very similar economies, economy N and economy M, implement a tax cut of equal size. The tax cut in economy N is permanent, while the tax cut in economy M is temporary. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the (temporary tax cut/permanent tax cut) .
Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are priced at $1 each. The government has devised the following tax plans: Plan A • Consumption up to 1,000 coconuts is taxed at 35%. • Consumption higher than 1,000 coconuts is taxed at 20%. Plan B • Consumption up to 2,000 coconuts is taxed at 10%. • Consumption higher than 2,000 coconuts is taxed at 25%. Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption level of 700 coconuts, 1,500 coconuts, and 2,500 coconuts, respectively. Consumption Level Plan A Plan B (Quantity of coconuts) Marginal Tax Rate Average Tax Rate
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Suppose C = 100 + .8 (Y - T). If the government reduces lump sum taxes by $20, which statement is NOT true? 3D a The economy's IS curve will shift to the right by more than the change in taxes. b The economy's IS curve will shift upward. The economy's IS curve will shift horizontally to the right by $80. d The economy's IS curve will shift to the right by $100.
12. Assume that the consumption function is given by C= 200+ 0.7 (Y-7), the tax function is given by T = 100+ 0.2Y, and Y= 50K0.5L0.5, where K= 100. If L increases from 100 to 144, then consumption increases by: a. 560. b. 840. c. 1,120. d. 2,120.
Suppose that the Philippine tax schedule given below is being implemented this year. (sorry, disregard the box) Tax Payment P 1,000 4,500 14,000 Annual Income P10,000 30,000 70,000 140,000 250,000 500,000 35,000 75,000 160,000
Please write down whether the following statements are true or false, and explain your answer very briefly. If prices are constant economic incidence would be the more than legislative (statutory) incidence. Regarding incidence analysis, if we examine distributional changes which result if one tax is substituted for another while holding total expenditure and tax revenue as constant, then we use budget incidence. If the individual works more after the tax on labour, that means substitution effect outweighs the income effect. Supply side economists are for increasing the tax rates. As a result of increase in the tax rate, both excess burden and taxrevenue increase. 4 A progressive tax system encourages individuals to work harder. The more elastic is demand is relative to supply, the greater the portion of burden is borne by consumers.
3
In one of your lectures, you heard your teacher saying that the government of a country is usually a net demander of funds. You felt extremely disappointed to know this and wanted to tell your teacher that he may be incorrect in his assertion. After all, the government pays salaries to so many people in the public service. It also takes care of the citizens through numerous projects like roads, hospitals, schools, utilities like electricity and water and many more public welfare activities. In a way therefore, the government releases funds in billions of dollars so that the country can run efficiently and productively. In your opinion the government supplies more than it takes. Your teacher Dr. B appears to be an arrogant man and you would rather discuss this confusion with one of your classmates whom you are close with and whom you think has a natural aptitude towards economics and finance. His name is Gordon. Briefly narrate how Gordon would remove your confusion.
Consider an economy described by the following equations. Y=C+I+G C=100+.75(Y−T) I=500−50r G=125 T=100 Where: Y is GDP, C is consumption, I is investment, G is government spending, T is taxes and r is the rate of interest. Question: 1. Assuming that no change in fiscal policy, what is the effect of a reduction in interest rate from 4 percent to 3 percent on equilibrium output? 2. Suppose the Central Bank policy is to adjust the money supply to maintain the interest rate at 4 percent, so r=4. What is the value of output?
Consider a government that raises money in a two-good economy by taxing good 1 at a rate of t per unit. The government is considering replacing these taxes with a lump-sum tax to the consumer that raises the same revenue. Thus, if the consumer consumes x units of good 1 before the change in taxes, she must pay the government a lump sum of tx after the change. Suppose, moreover, that prices change only by the amount of the tax; i.e., if prices are (p₁+t, p2) before the change, then they become (P₁, P2) after. Let x = (x1, x₂) be the consumer's demand before the change, and x' (x1,x2) the consumer's demand after. Suppose that x = x'. = (a) Is one of x or x' revealed preferred to the other (and if so, which)? (b) Assuming that the consumer's demand satisfies the Weak Axiom of Revealed Preference, does the change in taxes lead to an increase or decrease in consumption of Good 1, or is it impossible to determine? What about Good 2?
For an economy, the following information is given to you. C= 0.7(1 -t)Y I 300-0.02r M"/P= 2+0.2Y – 0,3r where C is consumption t is proportion income tax rate, I is investment, M" is money demand, P is price, Y is income (output) and r is real interest rate. If Government expenditure (G) is 479 , tax rate (t) is 14%, price level ( P) is 17, and nominal money supply is 980, the IS-LM equilibrium output is (two decimal points).

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