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Effect of a tax cut on equilibrium consumption and GDP

Assuming an economy can be represented by the following simplified model (all values are measured in $billion):

C=200+0.5Yd, I=100, G=150, TP=100, X=M, Yd=Y-TP

Please discuss the impacts of a $20 billion tax (TP decrease by 20) cut on equilibrium Y (GDP) and C (personal consumption).

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Solution Preview

Because Yd = Y - TP, decreasing TP by 20 causes Yd to increase by 20.

Let C1 be consumption before the tax cut ...

Solution Summary

Given equations for consumption (C), disposable income (Yd), personal taxes (TP), government spending (G), investment (I) and net exports (NX), this solutions shows the effect of a $20 billion tax cut on C and on Gross Domestic Product (GDP).