Assume that, without taxes, the consumption schedule for an economy is shown below:GDP, BillionsConsumption, Billions$100$120200200300280400360500440600520700600 Graph this consumption schedule and determine the size of the MPC.Assume that a lump-sum (regressive) tax of $10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the MPC and the multiplier.Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200. 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and multiplier.Explain why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not. Demonstrate, using a graph similar to Figure 30.3

Equation of consumption function: C=c+bY-T Where T=0 C=c+bY ....(1) Where b is known as the…

Answered: Assume that, without taxes, the…

Economics:

10th Edition

ISBN:9781285859460

Author:BOYES, William

Publisher:BOYES, William

Chapter11: Fiscal Policy

Section: Chapter Questions

Problem 19E

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Assume that, without taxes, the consumption schedule for an economy is shown below:

GDP, Billions	Consumption, Billions
$100	$120
200	200
300	280
400	360
500	440
600	520
700	600

Graph this consumption schedule and determine the size of the MPC.

Assume that a lump-sum (regressive) tax of $10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.

Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the MPC and the multiplier.

Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200. 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and multiplier.

Explain why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not. Demonstrate, using a graph similar to Figure 30.3

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