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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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.
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).
4. The equilibrium levels of income Y, consumption C, disposable income Ya, and taxation T, for a three-sector macroeconomic model satisfy the structural equations: Y = C + 1, + Go C = a + bYd (0 0) Ya = Y – T T = tY + T, (0 0) Express this system in the form AX = d Using Cramer's rule, find the equilibrium levels of consumption (C*), disposable income (Ya*) and taxation (T*) i. ii.

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