Compute decrease in consumption due to lump sum tax and use

Reference no: EM13391948

(a) Now add the public sector as represented by gov't spending and taxes as in columns 5 & 6 in table below.

(b) Calculate the decrease in consumption due to the lump sum tax, and use it to find the consumption after tax (ca-fill in the column 7).

(c) Use the Ca to find the aggregate expenditures (after tax) for the 4 sector private-public-open economy and fill in the column 8. Now use the column 1 and column 9 to find the new equilibrium GDP.

(d) Compare equilibrium GDP in the 4-sector with 3-sector equilibrium: Has the GDP changed? If so, by how much? Why? What is the effective multiplier from 3-sector to 4-sector? Explain.

(e) Write the budget of the federal gov't and show whether it is in surplus or in deficit.

(f) Find levels of consumption and savings at the new higher (4-sector) equilibrium and compare them with those in a 3-sector you obtained earlier. Explain why there is no change in consumption and savings even though GDP is higher.

(g) Show the 3-sector and the 4-sector equilibrium on the same graph.

(h). calculate the effect of the followings on the GDP:

1. an increase of $50 in government expenditures?

2. a decrease of $50 in taxes?

3. an equal increase of $50 in both taxes and government spending?

4. Which fiscal policy has the least impact on the government budget? Explain!

Reference no: EM13391948

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