Question

Assume that, without taxes, the consumption schedule of an economy is as follows:

Assume that, without taxes, the consumption schedule of an economy is as follows:Compare the MPC and the multiplier with those of the pretax consumption schedule. Instructions: Round your answers to 1 decimal place. MPC after tax = ______ ? Multiplier after tax = ______ ? The MPC and multiplier are: higher before the tax OR higher after the tax OR the same before and after the tax ? b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Add the after-tax consumption to the table below. a. What is the value of the MPC? _______ .Graph the resulting consumption schedule. Instructions: Use the tool provided 'CE' to draw the consumption schedule. Plot 8 points total.

a. What is the value of the MPC? _______

     .Graph the resulting consumption schedule.

Instructions: Use the tool provided 'CE' to draw the consumption schedule. Plot 8 points total.

b. Assume now that a lump-sum tax is imposed such that the government collects $10 billion in taxes at all levels of GDP. Add the after-tax consumption to the table below.

Compare the MPC and the multiplier with those of the pretax consumption schedule.

Instructions: Round your answers to 1 decimal place.

MPC after tax = ______ ?

Multiplier after tax = ______ ?

The MPC and multiplier are: higher before the tax OR higher after the tax OR the same before and after the tax ?

Answer 1

1. C= .8*Y+ 40

MPC=.8

b.

Y (GDP)	Consumption	Reference line	Tax	C=40+.8*(Y-T)
0	40	0	10	32
100	120	100	10	112
200	200	200	10	192
300	280	300	10	272
400	360	400	10	352
500	440	500	10	432
600	520	600	10	512
700	600	700	10	592

MPC after tax =.8 multiplier after tax is 1/(1-.8) = 5. Since the tax is lumpsum tax so it has no effect on multiplier and MPC