Question

14. Suppose that the economy of Wonderland is described by the following equations: Planned consumption: C = 200 + 0.8Yd Disposable income: Yd=Y-T Income taxes: T = 200 Planned government expenditure: G = 100 Planned investment: I = 200 Planned export: X = 200 Planned import: M = 0.2Y, All variables are measured in real value. a. What is the equilibrium output? Please show your calculation. b. Suppose that the government on Wonderland succeeds in reducing income taxes from 200 to 160. What are new equilibrium output and the tax multiplier? c. List two arguments that are likely to be used in support of such a tax cut in part (b). Briefly explain your answer. d. List two arguments that might be used to oppose such a tax cut in part (b). Briefly explain your answer.

Answer 1

c=200+ 0.8 YD T = 200 a=100 x=200 M = 0.24 I= goo egen Y = AE = CATAGINX Y~2004 o8 10.8x) + Y- 2000.8 (Y-200) + 200 + 100 + 200 - Y=200+ 0.84-160 +50o-0.27 0.8 0.2+0.2 4-0.64 = 540 1.500 1350 Tax multiplier = -mpcamion or Tax decreases from 200 to 160 - AT= -40 s4=tax multiplic = 2 DY= goo New Y. 1350 80=480 - New Y= 1250+80 = 120 1430 d c) a) It increases car lewal of output by the greater amoent than the reduction intakes 6) 24 may increase private savings a ) It increase gout deficit or reduces gout, suplus. sam could have done by increasing in a and increase in a required would be less than a decrease in tax.