In a model with a proportional income tax rate (t), real disposable income equals
A)t * real GDP
B)(1 - t) * real GDP
C)real GDP/t
D)real GDP/(1 - t)
E)real GDP - (1 - t)

Question

Quizplus · Accepted Answer

Real disposable income is equal to real GDP minus taxes paid. In a proportional income tax system, the tax rate is constant, so taxes paid are equal to the tax rate multiplied by real GDP. Therefore, real disposable income equals (1-t) times real GDP. This is option B.

In a Model with a Proportional Income Tax Rate (T)