Suppose we are in an economy with rich households and poor households. Rich and poor households have different consumption functions, with Cpoor = 100 + 35(Y poor − Tpoor) Crich = 100 + 15(Y rich − Trich) where Y rich, Y poor are the incomes of rich and poor households and T rich, T poor are the taxes faced by rich and poor households. We also have I = 200,G = 100, T = T poor + T rich = 100. Closing out the model, Y = C + I + G = Cpoor + Crich + I + G a Suppose that Y poor = Y rich Y2 (in other words, the total income of poor households is equal to total income of rich households.) Supposing further that T rich = T poor = 50, calculate equilibrium output Y . b Now suppose that Trich = 40,Tpoor = 60. What is equilibrium output now? c How can the government increase output without changing the deficit (hint: think about the difference between output in b and output in c.) d Now assume that T rich = 40, T poor = 60, but instead of output being split equally between rich and poor households, Y poor = 25 Y, Y rich = 35 Y . What does this model predict about the impact of inequality on output? Explain the economic intuition.
Suppose we are in an economy with rich households and poor households. Rich and poor households have different consumption functions, with Cpoor = 100 + 35(Y poor − Tpoor) Crich = 100 + 15(Y rich − Trich) where Y rich, Y poor are the incomes of rich and poor households and T rich, T poor are the taxes faced by rich and poor households. We also have I = 200,G = 100, T = T poor + T rich = 100. Closing out the model, Y = C + I + G = Cpoor + Crich + I + G a Suppose that Y poor = Y rich Y2 (in other words, the total income of poor households is equal to total income of rich households.) Supposing further that T rich = T poor = 50, calculate equilibrium output Y . b Now suppose that Trich = 40,Tpoor = 60. What is equilibrium output now? c How can the government increase output without changing the deficit (hint: think about the difference between output in b and output in c.) d Now assume that T rich = 40, T poor = 60, but instead of output being split equally between rich and poor households, Y poor = 25 Y, Y rich = 35 Y . What does this model predict about the impact of inequality on output? Explain the economic intuition.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Suppose we are in an economy with rich households and poor households. Rich and poor households have different consumption functions, with
Cpoor = 100 + 35(Y poor − Tpoor) Crich = 100 + 15(Y rich − Trich)
where Y rich, Y poor are the incomes of rich and poor households and T rich, T poor are the taxes faced by rich and poor households. We also have I = 200,G = 100, T = T poor + T rich = 100. Closing out the model,
Y = C + I + G = Cpoor + Crich + I + G
a Suppose that Y poor = Y rich Y2 (in other words, the total income of poor households is equal to total income of rich households.) Supposing further that T rich = T poor = 50, calculate equilibrium output Y .
b Now suppose that Trich = 40,Tpoor = 60. What is equilibrium output now?
c How can the government increase output without changing the deficit (hint: think about the difference between output in b and output in c.)
d Now assume that T rich = 40, T poor = 60, but instead of output being split equally between rich and poor households, Y poor = 25 Y, Y rich = 35 Y . What does this model predict about the impact of inequality on output? Explain the economic intuition.
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