--%>
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 : FX Rates & The Balance of Payments The

    The Financial Account captures international fund flows due to

    		•
  • Q : Are government budget scarcities always

    ‘The country is at present in recession and this has led to worse tax revenue and high expenses. The effect is a huge deficit. The government decides to increase taxes and lower government expenses. Is this an excellent idea?’

    		•
  • Q : Shifting of demand curve due to new

    Assume that the launch of Microsoft Xbox 360 moved the demand curve for Sony PlayStation 2 games from D0 to D1 throughout similar period if new game designers enter into this market and hence supplies of PlayStation 2 games shifted S0 to S1. The market equilibrium: (1

    		•
  • Q : About macroeconomics Do you think that

    Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case?

    		•
  • Q : Macroeconomics-fiscal and monetary

    1) How can governments seek to control their national economies through fiscal and monetary policies?2) What are the causes of the fiscal deficits experienced by many developed nations in the past three years and what are the main effects

    		•
  • Q : Elasticity of brain power When doubling

    When doubling your viewing of soap operas to 16 hrs per week reasons your IQ score to drop/fall from a mastermind level of 140 to a sluggish 70, your TV elasticity of brain power will be: (i) + 1.0. (ii) zero. (iii) – 1.0. (d) +0.5. (e) -0.5.

    		•
  • Q : Tax when consumer pay high price When a

    When a tax on goat cheese is completely paid by consumers via higher prices, then the tax has been: (i) alleviated. (ii) Forward shifted. (iii) Backward shifted. (iv) Actualized. (v) Randomized. Can someone help me in getting throu

    		•
  • Q : Evaluation of net present value Explain

    Explain evaluation of net present value (NPV) and internal rate of return (IRR) in brief?

    		•
  • Q : Illustration of equal marginal advantage

    Can someone please help me in finding out the accurate answer from the following question. Shoppers who shift among checkout lanes until it emerges that all register lines are probable to be equally time-consuming are trying to verify to the law of: (i) Equivalent mar

    		•
  • Q : Consumer Equilibrium when current

    Can someone please help me in finding out the accurate answer from the following question. When Brussels sprouts cost $1 per pound and tofu is $2 per pound and your marginal utilities (additional jollies) from either an additional pound of tofu or an additional pound

    		•