Consider an economy similar to that in the preceding question in which investment is also $200, government purchases are also $500, net exports are also $30, and the price level is also fixed. But taxes now vary with income and, as a result, the consumption schedule looks like the following: GDP Taxes DI C $1,360 $320 $1,040 $810 1,480 360 1,120 870 1,600 400 1,200 930 1,720 440 1,280 990 1,840 480 1,360 1,050 Find the equilibrium graphically. What is the marginal propensity to consume? What is the tax rate? Use your diagram to show the effect of a decrease of $60 in government purchases. What is the multiplier?
- Consider an economy similar to that in the preceding question in which investment is also $200, government purchases are also $500, net exports are also $30, and the price level is also fixed. But taxes now vary with income and, as a result, the consumption schedule looks like the following:
GDP Taxes DI C
$1,360 $320 $1,040 $810
1,480 360 1,120 870
1,600 400 1,200 930
1,720 440 1,280 990
1,840 480 1,360 1,050
Find the equilibrium graphically. What is the marginal propensity to consume? What is the tax rate? Use your diagram to show the effect of a decrease of $60 in government purchases. What is the multiplier? Compare this answer to your answer to Test Yourself Question 1. What do you conclude?
|
GDP |
TaXES |
Disposable income (DI) |
Consumption |
Investment |
Government Purchases |
NetExports(X-IM) |
Total Expenditure AE |
|
1,360 |
320 |
1,040 |
810 |
200 |
440 |
30 |
1,480 |
|
1,480 |
360 |
1,120 |
870 |
200 |
440 |
30 |
1,540 |
|
1,600 |
400 |
1,200 |
930 |
200 |
440 |
30 |
1,600 |
|
1,720 |
440 |
1,280 |
990 |
200 |
440 |
30 |
1,660 |
|
1,840 |
480 |
1,360 |
1,050 |
200 |
440 |
30 |
1,720 |
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