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ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
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 variable taxes, fixed taxes do not vary with GDP The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a variable 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. 8 8 REAL CONSUMER SPENDING (Billions of dollars) 8 9 + + + O + + + 20 40 60 REAL GDP (Billions of dollars) 80 + O + 100 Consumption with Tax Increase through a Variable Tax Consumption with Tax Increase through a Fixed Tax The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure.
Transcribed Image Text:6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike variable taxes, fixed taxes do not vary with GDP The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a variable 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. 8 8 REAL CONSUMER SPENDING (Billions of dollars) 8 9 + + + O + + + 20 40 60 REAL GDP (Billions of dollars) 80 + O + 100 Consumption with Tax Increase through a Variable Tax Consumption with Tax Increase through a Fixed Tax The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure.
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 85 Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the tax increase through a variable tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. 100 45-degree line ✓= REAL GDP (Billions of dollars) a variable tax a fixed tax Suppose that the government also considered a fixed tax hike 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 tax increase through a variable 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 tax increase through a fixed 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 tax increase through a fixed tax indicated on the top graph.
Transcribed Image 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 85 Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the tax increase through a variable tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. 100 45-degree line ✓= REAL GDP (Billions of dollars) a variable tax a fixed tax Suppose that the government also considered a fixed tax hike 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 tax increase through a variable 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 tax increase through a fixed 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 tax increase through a fixed tax indicated on the top graph.
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