Let there be a flat 20 percent income tax. Let the consumption function for an economy be given by C = 160 + 0.8YDP with permanent disposable income specified by YDP = 0.6YD + 0.4YD-1). If investment equals 200 and government spending amounts to 300, then what level of GDP would be equilibrium one year after GDP reached $1,500?

Question

Quizplus · Accepted Answer

To find the equilibrium GDP, we calculate the disposable income (YDP) and consumption (C) for the current year. With a 20% tax, disposable income is 0.8Y. Using the given function YDP = 0.6YD + 0.4YD-1, and YD-1 = 1500, we find YDP. Then, calculate C using C = 160 + 0.8YDP. The equilibrium GDP is where total output (Y) equals total spending (C + I + G). Solving these equations gives an equilibrium GDP of $1,530.

Let There Be a Flat 20 Percent Income Tax