# Question

Assume that, without taxes, the consumption schedule for an economy is as shown below:

GDP, Consumption,

Billions Billions

$100 ..........$120

200 .......... 200

300 .......... 280

400 .......... 360

500 .......... 440

600 .......... 520

700 .......... 600

a. Graph this consumption schedule and determine the size of the MPC.

b. Assume 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. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.

c. Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the MPC and the multiplier.

d. Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200, 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.

e. Explain why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not. Demonstrate, using a graph similar to Figure.

Built-instability

GDP, Consumption,

Billions Billions

$100 ..........$120

200 .......... 200

300 .......... 280

400 .......... 360

500 .......... 440

600 .......... 520

700 .......... 600

a. Graph this consumption schedule and determine the size of the MPC.

b. Assume 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. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.

c. Now suppose a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the MPC and the multiplier.

d. Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200, 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.

e. Explain why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not. Demonstrate, using a graph similar to Figure.

Built-instability

## Answer to relevant Questions

How do economists distinguish between the absolute and relative sizes of the public debt? Why is the distinction important? Distinguish between refinancing the debt and retiring the debt. How does an internally held public ...What are the three basic functions of money? Describe how rapid inflation can undermine money’s ability to perform each of the three functions.Following are two hypothetical ways in which the Federal Reserve Board might be appointed. Would you favor either of these two methods over the present method? Why or why not? a. Upon taking office, the U.S. president ...Explain why a single commercial bank can safely lend only an amount equal to its excess reserves but the commercial banking system as a whole can lend by a multiple of its excess reserves. What is the monetary multiplier, ...Explain how the bank panics of 1930 to 1933 produced a decline in the nation’s money supply. Why are such panics highly unlikely today?Post your question

0