Question

5. Automatic adjustments to the government budget The following table provides some information on government expenditures (G) and tax revenues (T) at different levels of real GDP in a hypothetical economy. Throughout this problem you should assume that government transfers (TR) are zero. Real GDP (Billions of dollars) 460 Government Expenditures (G) (Billions of dollars) 72 72 72 Tax Revenues (T) (Billions of dollars) 70 72 74 540 Use the blue line (circle symbols) to plot the government expenditures schedule presented in the table. Then use the orange line (square symbols) to plot the economy's tax revenues schedue. G AND T (BAliens of dollars 80 72 A Surpluses 400 440420 560 00 REAL GOP 1Btions of dollars HA Consider the government expenditures and tax revenues schedules you plotted. When relGDP is $540 billion, the government runs a budget defcit of$5 billion Use the red triangle (cross symbols) to shade the region between the tax revenues schedule and the government purchases schedule in which the levels of real GDP are associated with government budget deficits. Then use the green triangle (triangle symbols) to shade the region between the two schedules in which the levels of real GDP are associated with budget surpluses. Imagine the government in this economy decides to decrease the progressivity of its personal income tax system. Specifically, the government increases the average tax rate paid by households at lower income levels and reduces the average tax rate paid by households at higher income levels. This change to the tax system will cause the slope of the tax revenues schedule to become flatter whichl decrease the economy's built-in stability.

Answer 1

G AND T(BAliens of dollars 80 76 72 Deficits 68 A Surpluses 64 60 400 440 480 520 560 00 REAL ODP Biltions of dollarsl

When GDP = 540, then G = 72, & T = 74,

Hence as T> G, so budget surplus = T-G = $2 billion.

Budget surplus, when T>G,

deficit when T< G

G AND T(BAliens of dollars 80 76 72 Deficits 68 A Surpluses 64 60 400 440 480 520 560 00 REAL ODP Biltions of dollarsl

∆ ABC surplus

∆DCE : deficit

tax revenue schedule gets flatter, when higher tax rate at lower level of income, thus will decradec build in stability