Tax policy is one used not only for economic purposes but also for political purposes. It is the opinion of many in congress and the current president that the rich should pay more of their income in taxes, and that the resulting fairness from this rise in taxes will lead to more economic growth and a rise in employment. Using the simple expenditure model (Y and Ep, not IS-LM, not AS-AD) answer these two questions: One, would a lump-sum tax increase on many high-income households cause GDP to rise in the short run as predicted by the politicians? Why or why not? And two, are there macroeconomic conditions involving Y and Ye in this simple expenditure model under which such a tax increase would be fully warranted? Draw the graphs and explain the outcomes for both cases.

1) Tax is a mandatory payment made to the government by all individuals, organizations, and…

Answered: Tax policy is one used not only for…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Tax policy is one used not only for economic purposes but also for political purposes. It is the opinion of many in congress and the current president that the rich should pay more of their income in taxes, and that the resulting fairness from this rise in taxes will lead to more economic growth and a rise in employment. Using the simple expenditure model (Y and Ep, not IS-LM, not AS-AD) answer these two questions: One, would a lump-sum tax increase on many high-income households cause GDP to rise in the short run as predicted by the politicians? Why or why not? And two, are there macroeconomic conditions involving Y and Ye in this simple expenditure model under which such a tax increase would be fully warranted? Draw the graphs and explain the outcomes for both cases.

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