Question

GDP computations.

Consumption = C, Taxes = T, Investment Demand = ID, Disposable Income = Y-T, Govt. Purchases of Goods and Services = G Aggregate Expenditure = AE, the MPC is constant, Foreign trade is zero. In case you care, autonomous consumption = $10.

AS = Y	T	Y-T	C	ID	G	X-Im	AE	d(Invt.)
$1,800	$200		$1,210	$500	$200	$10
$2,000	$200		$1,360	$500	$200	$10
$2,200	$200			$500	$200	$10
$2,400	$200			$500	$200	$10
$2,600	$200			$500	$200	$10
$2,800	$200			$500	$200	$10
$3,000	$200			$500	$200	$10

a) Please fill out the table above.

b) How much of a tax cut would it take to raise equilibrium by $400?

Answer 1

(a) C= Autonomous consumption + MPC(Yd)

MPC = (change in C/ Change in Yd) = (1360-1210)/(1800-1600)= (150/200)= 0.75

C= 10 + 0.75Yd

Y	T	Yd=Y-T	C	I	G	NX=X-M	AE=C+IG+NX
1800	200	1600	1210	500	200	10	1920
2000	200	1800	1360	500	200	10	2070
2200	200	2000	(10)+(0.75)(2000)=1510	500	200	10	2220
2400	200	2200	(10)+(0.75)(2200)=1660	500	200	10	2370
2600	200	2400	(10)+(0.75)(2400)=1810	500	200	10	2520
2800	200	2600	1960	500	200	10	2670
3000	200	2800	2110	500	200	10	2820

(b) Tax multiplier = (-MPC/1-MPC)= -0.75/1-0.75 = -0.75/0.25= -3.

To raise equilibrium GDP by 400 , the tax cut must be (400/3)= -$133.33.