The following information is for a closed economy:

-Refer to the above information.If in addition to spending $80 billion at each level of GDP,government imposes a lump-sum tax of $100:
A) equilibrium GDP will now be $350.
B) equilibrium GDP will now be $400.
C) equilibrium GDP will now be $300.
D) the equilibrium GDP cannot be determined.

Question

The following information is for a closed economy:
 
-Refer to the above information.If in addition to spending $80 billion at each level of GDP,government imposes a lump-sum tax of $100:
A) equilibrium GDP will now be $350. 
B) equilibrium GDP will now be $400. 
C) equilibrium GDP will now be $300. 
D) the equilibrium GDP cannot be determined.

Quizplus · Accepted Answer

The correct answer is A.With a lump-sum tax of $100, the disposable income at each level of GDP will be $80 billion lower. This means that the equilibrium GDP will be lower than it would be without the tax. The new equilibrium GDP will be $350 billion, which is the level of GDP at which the disposable income is equal to the planned aggregate expenditure.

The Following Information Is for a Closed Economy