Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
7th Edition
ISBN: 9780134472669
Author: Blanchard
Publisher: PEARSON
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Question
Chapter 3, Problem 7QAP
a.
To determine
To graph: The impact of an increase in transfer payments (which is financed through government borrowings) on equilibrium output.
b.
To determine
To explain: The impact of an increase in transfer payments on equilibrium output if the government will pay for the increase in transfer payments.
c.
To determine
To explain: The impact of an increase in transfer payments on equilibrium output, if a transfer policy increases taxes on those with a low propensity to consume to pay for transfer to people with a high propensity to consume.
d.
To determine
To explain: Whether tax cuts will be more effective at stimulating output when they are directed towards high income or toward low-income taxpayers.
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Recall that we define taxes, T, as net of transfers. In other words,
T = Taxes - Transfer Payments
Suppose that the government increases transfer payments to private households,
but these transfer payments are not financed by tax increases. Instead, the
government borrows to pay for the transfer payments.
Using the diagram on the right, show how this policy affects equilibrium output.
1.) Using the line drawing tool, show the effect on demand. Label your new curve
'ZZ₂'.
2.) Using the point drawing tool, indicate the new equilibrium point. Label your
point 'E₂'.
Carefully follow the instructions above and only draw the required objects.
Demand Z, Production Y
NY1
E₁
Y1
Income, Y
Production
ZZ
Imagine this economy has a 10% tax on income.
The following are exogenous (not directly affected by income):
G = 11
I = 4
X = M = 0
The consumption function is:
C = k + cY, where k = 3, c = 0.8
Now we have to take that tax into account. Here is a way to think about it:
Look at the consumption function. It says if you give me one more dollar of income I will spend 80 cents of it (mpc = 0.8). BUT I can only spend what I receive. I can only spend my after-tax or disposable income.
With a 10% tax, I don't receive Y I receive 90% of Y or Y*(1-t) where t = 10% or 0.1.
Let's define disposable income as Yd where Yd = Y*(1-t).
Therefore we restate our consumption function as C = k + cYd
Now we have, in this case, C = k + cYd or C = 3 + 0.8Yd or C = 3 + 0.8*(Y*[1-0.1]) or C = 3 + 0.72Y.
Now what is the equilibrium GDP?
Give the answer to ONE decimal place.
Suppose the government of a particular state has a large surplus, so the state's
policymakers want to provide a large one-time tax cut (i.e., a decrease in taxes)
sometime soon. In parts a.) - c.), show ( on a different graph for each part), how
the tax cut under the given conditions would affect the equilibrium Price Level
and GDP in the state (in parts b.) and c.), include any changes caused by the
Self-Correcting Mechanism- i.e., assume the tax cut happens first, followed by
any changes caused by the Self-Correcting Mechanism).
a.) A tax cut when the economy exhibits a Recessionary Gap ( assume that the
tax cut gets the economy back to the "Natural Rate of Output". So there
will be no changes caused by the Self-Correcting Mechanism in this part) (1)
b.) A tax cut when the economy is operating at the "Natural Rate of Output”. (1)
c.) A tax cut when the economy exhibits an Inflationary Gap. (1)
d.) In which of the 3 cases above does the macroeconomy have the LEAST
inflation (just list…
Chapter 3 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
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