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Economics question

Problem 2. Balanced Budgets and Automatic Stabilizers.
So far in class we have been assuming that the fiscal policy variable T is independent on the level of income. In the real world, however Taxes typically depend on income. Consider the following model of the Economy:
C=c0+c1YD
T=t0+t1Y
I=Ī constant
G is a given number decided by the government.
a) Do you believe t1 should be greater of less than zero? Is it reasonable to assume t1 to be greater of less than one? Explain.
b) A proportional tax system is a system of income taxation where taxes are levied as a fixed percentage on income, independently on its level. In contrast, a tax system is called progressive when income is taxed more heavily (in percentage terms) when its level is high. What is the condition on t0 needed to have a proportional tax system? And what if we want a progressive system? What type of tax system is actually in use in UK?
c) Solve for the equilibrium expressions of output and taxes in our economy.
d) Now set t0=0, t1=0.25, c0=5, c1=0.8, Ī=0, and G=10. Compute the equilibrium levels of Y and T. Does the government balance its budget?
e) What is the Keynesian multiplier of income in this economy?
f) In real world, having a fiscal policy with t1>0 is often called an "automatic stabilizer". According to the result you obtained above, do you agree with this definition? Why?
g) Suppose now that the government cuts spending in order to keep the budget balanced. What will be the effect on Y? (You are not required to do all the algebra, you can answer in words).



Any help with any of that would be much appreciated, I haven't got a clue
Reply 1
DuncanM
Problem 2. Balanced Budgets and Automatic Stabilizers.
So far in class we have been assuming that the fiscal policy variable T is independent on the level of income. In the real world, however Taxes typically depend on income. Consider the following model of the Economy:
C=c0+c1YD
T=t0+t1Y
I=Ī constant
G is a given number decided by the government.
a) Do you believe t1 should be greater of less than zero? Is it reasonable to assume t1 to be greater of less than one? Explain.
b) A proportional tax system is a system of income taxation where taxes are levied as a fixed percentage on income, independently on its level. In contrast, a tax system is called progressive when income is taxed more heavily (in percentage terms) when its level is high. What is the condition on t0 needed to have a proportional tax system? And what if we want a progressive system? What type of tax system is actually in use in UK?
c) Solve for the equilibrium expressions of output and taxes in our economy.
d) Now set t0=0, t1=0.25, c0=5, c1=0.8, Ī=0, and G=10. Compute the equilibrium levels of Y and T. Does the government balance its budget?
e) What is the Keynesian multiplier of income in this economy?
f) In real world, having a fiscal policy with t1>0 is often called an "automatic stabilizer". According to the result you obtained above, do you agree with this definition? Why?
g) Suppose now that the government cuts spending in order to keep the budget balanced. What will be the effect on Y? (You are not required to do all the algebra, you can answer in words).



Any help with any of that would be much appreciated, I haven't got a clue


Well, your formulas, aren't exactly easy for me to understand, but is it something like this:
C= total consumption
c0= autonomus consumption
c1= variable consumption (dependant on income)
Y= income
D= wtf? demand?

T= total tax
t0= Direct tax
t1= variable tax (dependant on income)

I=??
Ī= ??
Reply 2
DuncanM

C=c0+c1YD
T=t0+t1Y
I=Ī constant
G is a given number decided by the government.
a) Do you believe t1 should be greater of less than zero? Is it reasonable to assume t1 to be greater of less than one? Explain.


If t1 is zero, there would be only a fixed level of tax, no matter what income one has. Usually, countries employ some kind of proportional tax, i.e. t1>0. But t1 should't be larger than 1, as then you would pay more tax that what you actually earn!
Reply 3
DuncanM

C=c0+c1YD
T=t0+t1Y
I=Ī constant
G is a given number decided by the government.
b) A proportional tax system is a system of income taxation where taxes are levied as a fixed percentage on income, independently on its level. In contrast, a tax system is called progressive when income is taxed more heavily (in percentage terms) when its level is high. What is the condition on t0 needed to have a proportional tax system? And what if we want a progressive system? What type of tax system is actually in use in UK?


since it states that proportional tax takes a percentage of income, ignoring what level of income one has, t0 has to be zero, or the tax would not be proportianal to everybody. I can show you in algebra, but I think you should try yourself (and I really can't be arsed... :biggrin: ) A progressive tax would jumble it up even more. Then you wouldn't have a linear equation anymore, but an exponential one. try figure this out yourself, and if you need more help pm me.

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