# Consumption is reduced by the MPC of the tax

```HOMEWORK PROBLEMS 9, 10,
12, 13 page 185
Chapter 9 #9 page 185
REAL
DOMESTIC
OUT PUT =
DI
AE,
EXPORTS
PRIVATE
CLOSED
ECONOMY
IMPORTS
\$200
\$240
\$20
\$30
250
280
20
30
300
320
20
30
350
360
20
30
400
400
20
30
450
440
20
30
500
480
20
30
550
520
20
30
NET
EXPORTS
AE,
PRIVATE
OPEN
ECONOMY
Chapter 9 #10 page 185
GDP
C
\$100
\$120
200
200
300
280
400
360
400
500
440
300
600
520
200
700
700
AE 600
600
500
100
C
45◦
100 200 300 400 500 600 700
GDP = DI
A. Graph the consumption schedule and
determine the MPC.
B. Assume that a lump-sum tax is imposed
such that the government collects \$10 billion
in taxes at all levels of GDP. Graph the
resulting consumption schedule, and compare
the MPC and the multiplier with those of the
pretax consumption schedule.
Consumption is
reduced by the
MPC of the tax
Chapter 9 #10 page 185
Consumption
after Tax
GDP
C
TAX
\$100
\$120
\$10
\$112
200
200
10
\$192
300
280
10
\$272
400
360
10
\$352
500
440
10
\$432
600
520
10
\$512
700
600
10
\$592
Equilibrium
GDP is reduced
by \$40.
Consumption is
reduced by \$8
and the
multiplier is 5.
The new
equilibrium
GDP is \$160.
Chapter 9 #12 page 185
REAL DOM
REAL
DOM.
OUTPUT
=DI
AE,
PRIVATE
CLOSED
ECONOM
Y
EXPORTS
IMPORTS
NET
EXPORTS
GOV’T
EXPEND.
TAXES
AE, OPEN
ECONOM
Y
200
240
\$20
\$30
\$-10
\$20
\$20
250
250
280
20
30
-10
20
20
290
300
320
20
30
-10
20
20
330
350
360
20
30
-10
20
20
370
400
400
20
30
-10
20
20
410
450
440
20
30
-10
20
20
430
500
480
20
30
-10
20
20
490
550
520
20
30
-10
20
20
530 The increase in government
spending of \$20 increases
Equilibrium GDP by \$100. \$20 X 5
(the multiplier) = 100.
What is the result if the
government plans to tax and
spend \$20 at each level of
GDP?
amount of the change in spending
(\$20).
The increase in taxes reduces
consumption by the MPC of the
tax. (20 X MPC (.8) = 16). 16 x 5
(the multiplier) = 80. Equilibrium
GDP is reduced by \$80.
The net result in the increase in taxes and the equal increase in spending is
and increase in Equilibrium GDP by the amount of the change in spending
(\$20).
Chapter 9 #13 page 185
POSSIBLE
LEVELS OF
EMPLOYMENT,
MILLIONS
REAL
DOMESTIC
OUTPUT
If full employment in this economy is
130 million, will there be an inflationary
expenditure gap or a recessionary
expenditure gap? RECESSIONARY
AE
90
\$500
\$520
100
550
560
110
600
600
120
650
640
130
700
680
What will be the consequence of this
Employment will be 20 million
gap?
less than at full employment.
By how much would AE in column 3 have
to change at each level of GDP to
eliminate the inflationary expenditure gap
or the recessionary AE gap? Explain \$20
What is the multiplier in this example?
5
Will there be an inflationary expenditure gap or a recessionary
INFLATIONARY
expenditure gap if the full-employment level of output is \$500 billion?
DEMAND-PULL INFLATION (higher prices, no
Explain the consequences.
increase in output)
By how much would AE in column 3 have to change at each level of GDP to eliminate the gap?
What is the multiplier?
5
\$20
```