Assume that, without taxes, the consumption schedule for an economy is shown in
ID: 1093845 • Letter: A
Question
Assume that, without taxes, the consumption schedule for an economy is shown in the first two columns of the table below.
Suppose that a lump-sum (regressive) tax of $10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP and enter the tax, disposable income, consumption, and tax rate in the table below.
Instructions: For the tax, disposable income, and consumption after tax columns, enter whole numbers for your answers. For the tax rate column, enter two decimal places for your answers.
Compare the MPC and the multiplier with those of the pretax consumption schedule.
Instructions: For the MPC values, round your answer to one decimal place. For the multiplier values, enter whole numbers for your answers.
MPC for the lump-sum tax consumption schedule =
MPC for the pretax consumption schedule =
The multiplier for lump-sum tax consumption schedule =
The multiplier for pretax consumption schedule =
(Billions) Consumption
Before Tax
(Billions) Tax
(Billions) Disposable
Income
(Billions) Consumption After Tax
(Billions) Tax
Rate
(Percent) $100 $120 $ $ $ % 200 200 % 300 280 % 400 360 % 500 440 % 600 520 % 700 600 %
Explanation / Answer
tax = 10 billion
DISPOSABLE INCOME: 90 190 290 390 490 590 690
the size of MPC is 80/100 or 0.8 since whenever GDP changes by 100, consumption changes by 0.8
CONSUMPTION AFTER TAX : 112 192 272 352 432 512 592
since MPC for pre tax consumption schedule = 0.8
multiplier for pre tax consumption schedule= 1/0.8 =1.25
MPC for tax consumption schedule = 0.2
multiplier = 1/0.2 = 5