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# Effect of a tax cut on equilibrium consumption and GDP

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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).

https://brainmass.com/economics/general-equilibrium/effect-of-a-tax-cut-on-equilibrium-consumption-and-gdp-404234

#### 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).

\$2.19