Explore BrainMass

Effect of a tax cut on equilibrium consumption and GDP

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

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).

© BrainMass Inc. brainmass.com October 25, 2018, 5:01 am ad1c9bdddf

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).

See Also This Related BrainMass Solution

Deficit Spending and the Public Debt

Suppose that Congress enacts a lump-sum tax cut of $750 billion. The marginal propensity to consume is equal to 0.75. If Ricardian equivalence holds true, what is the effect on equilibrium real GDP? On saving?

View Full Posting Details