--%>
Assignment Help - homework help

Explain Tax rate increase.

A change in tax rate changes the IS equation, LM equation remaining the same. Let same, let us suppose that the government raises the tax rate from 20 percent to 25 percent. The rise in tax rate from t = 0.20 to t = 0.25 would change the IS equation by changing the consumption function with increase in tax rate, the consumption function changes form C = 100 + 100 + 0.60 Y, given in Eq. to 

C= 100 + 0.75 [Y - (40 + 0.25Y + 40)]

= 100 + 0.5625Y

With change in the consumption function, the new IS schedule (say, IS2) can be obtained as follows. 

IS2 schedule: 

Y = C + I + G + ?G

= 100 + 0.5625Y + 250 - 4i +200

= 1257.14 - 9.14i

Given the new IS function (IS2) in Eq. the new equilibrium interest rate can be worked out as follows.

Is2 = LM

1257.14 - 9.14i = 800 + 80i

89.14i = 457.14

I = 5.13 (percent)

Once interest rate is known equilibrium income with tax effect can be computed by substituting the interest rate (5.13%) into the IS2 or LM equation. By using IS2 function, we get

Y = 1257.14 - 9.14i = 1257.14 - 9.14 (5.13)

The negative effect of increase in tax rate on the equilibrium income equals income before tax - rise less income after tax-rise that is

Tax effect = $1311.10 bn - $1210.25 bn

$100.85 billion

This calculation shows that increasing tax rate form t = 0.20 to I = 0.25 decreases equilibrium income by $100.85 billion. 

   Related Questions in Macroeconomics

  • Q : Principles of macroeconomics What are

    What are the “powers of the Federal Reserve

    		•
  • Q : Opportunity costs of consumption

    Individuals maximize the satisfaction whenever the marginal utilities of all goods are: (i) Precisely proportional to the consumer’s income. (ii) Maximized. (iii) Precisely proportional to the opportunity costs of consuming them. (iv) Equivalent

    		•
  • Q : Economics I help with part 2 and the 4

    I help with part 2 and the 4 part question.

    		•
  • Q : Substitution Effect explanation Can

    Can someone help me in finding out the right answer from the given options. The substitution effect is fully explained when: (i) Brandon just eat tofu since he is on a diet. (ii) A rise in the price of corn chips drives up demand for the salsa. (iii)

    		•
  • Q : Problem on equivalent Consumer Surplus

    Tom reimburses $5.00 for a ticket to see a present hit movie. If Tom was willing to reimburse up to $7.00 for that ticket, his consumer surplus equals: (1) $5.00 (2) $2.00 (3) $7.00 (4) Tom does not receive any consumer surplus as he purchased the ticket.

  • Q : Value of MPC when MPS is zero Determine

    Determine the value of MPC whenever MPS is zero? Answer: Whenever MPS = 0, MPC = 1 – 0 = 1.

    		•
  • Q : Is sale of scooter is national income

    Describe whether the sale of old scooter is comprised in national income?

    		•
  • Q : Subjective worth of Consumer Surplus

    The consumer gains from being capable to purchase at a single price rather than paying all that the particular quantity of the good is subjectively worth are: (i) Adverse selections. (ii) Market exploitation. (iii) Consumer surpluses. (iv) Moral hazards.

  • Q : Shortage of the good Describe when

    Describe when there will be a shortage of the good?

    		•
  • Q : Inflation movements and factors Use

    Use economic theory to explain the inflation movements and factors influencing it. Use relevant models to explain the impact of changes in fiscal and monetary policies in curtailing inflation.

    		•