Explore BrainMass

Explore BrainMass

    Effect of a tax cut on equilibrium consumption and GDP

    This content was COPIED 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 10, 2019, 3:01 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).