8. Changes in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 120 110 100 8 90 80 70 0 10 20 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. Investment spending in economy Y is more sensitive to changes in the interest rate than investment spending in economy Z. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the

8. Changes in taxes The following graph plots an aggregate demand curve. Using the graph, shift the aggregate demand curve to depict the impact that a tax hike has on the economy. PRICE LEVEL 130 120 110 100 8 90 80 70 0 10 20 30 OUTPUT Aggregate Demand 40 50 60 Aggregate Demand ? Suppose the governments of two very similar economies, economy Y and economy Z, implement a permanent tax cut of equal size. Investment spending in economy Y is more sensitive to changes in the interest rate than investment spending in economy Z. The economies are otherwise completely identical. The tax cut will have a larger impact on aggregate demand in the economy with the

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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The government lowers $0.9 trillion in taxes, restoring GDP from $10 trillion to its potential level of $11.2 trillion. What is the value of the tax multiplier? A -1.33 B -0.9 C -0.75 D -1 E -1.2
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Figure 4-11 LAFFER CURVE 100 в Tax Revenue Refer to Figure 4-11. On the Laffer curve shown, tax revenue could be increased by decreasing the marginal tax rates if we were currently at point A. O decreasing the marginal tax rates if we were currently at point C. O increasing the marginal tax rates if we were currently at point B. increasing the marginal tax rates if we were currently at point C. Tax Rate (percent)
The following table provides some information on government spending (G) and tax revenues (T) at different levels of real GDP in a hypothetical economy. Note: Throughout this problem you can assume, for simplicity, that government transfers are zero. Real GDP (Billions of dollars) 460 GOVERNMENT SPENDING AND TAXES (Billions of dollars) 80 78 76 74 Use the blue line (circle symbols) to plot the government spending schedule presented in the table. Then use the orange line (square symbols) to plot the economy's tax revenues schedule. 72 70 68 → 68 64 62 + 60 500 540 400 420 Government Spending (G) (Billions of dollars) 72 440 72 72 460 480 500 520 540 REAL GDP (Billions of dollars) 560 Tax Revenues (T) (Billions of dollars) 70 580 72 74 600 404-8141 Deficits Surpluses ?
Question 6 Which of the following economic policies is more Expansionary: O An increase in both government expenditures and taxes. A decrease in both government expenditures and taxes. A decrease in government expenditures accompanied by an increase in taxes. An increase in government expenditures accompanied by a decrease in taxes.
3. Refer to the figure. Tax Revenue M Tax Size 0 a. What is curve from the figure called? b. If the economy is at point M on the curve, then a small increase in the tax rate will increase or decrease tax revenue? Increase or decrease deadweight loss? C. If the economy is at point N on the curve, then a decrease in the tax rate will increase or decrease tax revenue? Increase or decrease deadweight loss?
In an economy such that: C = 200 + 0.80 (Y – T) Md = 0.20 Y - 10 R I = 40 - 20 R Ms = 200 + BP X = 30 - 0.05 Y BP = X + K T = 100 K = 20 + 10R G = 150 Determine the equilibrium levels of Y and R. If T increases to $150, what are the new Y and R? What is the tax multiplier?
Country D experiences a recession due to a decrease in consumer confidence. There are two economists, Andrew and Betty. Betty suggests the government to do nothing. Andrew suggests the government to implement fiscal policies to revive the economy as soon as possible. If the government adopts Betty’s policy, draw an AD-AS graph to show what happens to the economy in short run and then long run after the decrease in consumer confidence. Suppose the government adopts Andrew’s policy. (i) Will the government increase or decrease spending? (ii) The government cuts the income tax rate. After cutting the income tax rate, the total income tax revenue collected increases. Explain why. (iii) Will Andrew’s policy be more effective if MPC is smaller? Give one advantage of Betty’s policy over Andrew’s policy.
a) Explain very briefly what you understand from income effect and substitution effects of change in income tax rates (you do not need to use a graph) b) Discuss whether supply-side policies have been successful in improving the performance of an economy regarding taxation.
2. Fiscal policy Suppose a hypothetical economy is currently in a situation of deficient aggregate demand of $64 billion. Four economists agree that expansionary fiscal policy can increase total spending and move the economy out of recession, but they are debating which type of expansionary policy should be used. Economist A believes that the government spending multiplier is 8 and the tax multiplier is 4. Economist B believes that the government spending multiplier is 4 and the tax multiplier is 2. Compute the amount the government would have to increase spending to close the output gap according to each economist's belief. Then, for each scenario, compute the size of the tax cut that would achieve this same effect. Policy Options for Closing Output Gap Increase in Spending Tax Cut (Billions of dollars) Spending Multiplier (Billions of dollars) Tax Multiplier 4 Economist A 8 Economist B 4 2 Economist C favors increases in government spending over tax cuts. This means that Economist C…
- Most economists have reached the following conclusion about supply-side economics. Supply-side tax cuts are likely to reduce income inequality. Supply-side tax cuts are almost certain to lead to smaller budget deficits. Supply-side tax cuts are likely to widen income inequality. None of these.
INTEREST RATE (Percent) Demand LOANABLE FUNDS (Billions of dollars) Supply Scenario 1: Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%. Demand Shift the appropriate curve on the graph to reflect this change. This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to and the level of investment spending to Shift the appropriate curve on the graph to reflect this change. The implementation of the new tax credit causes the interest rate to Supply Scenario 2: An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit. This change in spending causes the government to run a budget Shift the…