Question

1. Suppose Kifwong is a small economy with only five people and two income tax rates. The first $4,000 earned each month are taxed 30%. Anything earned over $4,000 each month is taxed 45%. Anyone who is not working receives unemployment benefits of $2,500, paid for by the government. The table below shows the income for the five people at two different time periods. (5 pts.)

Person	Salary in Period 1	Salary in Period 2
Billy	$0	$3,000
Phillip	$3,500	$3,780
Turanga	$4,000	$4,320
Amy	$4,417	$4,770
Hubert	$5,000	$5,400
Total	$16,917	$21,270

1. Calculate the total tax revenue during the first period

2. Calculate the total tax revenue when the economy during the second period

3. Excluding Billy’s income, what is the percent change between total income in the first period and total income in the second period?

4. Briefly explain how the taxes act as an automatic stabilizer as the income increases from the first period to the second perio

5. Briefly explain how the fact that Billy earned a job in the second period acts as an automatic stabilizer.

Answer 1

Total tax revenue during 1 period. = 3500*30/100 + 4000*30/100+4417*45/100+5000*45/100 = 6487.65

Tota tax reveue during 2 period = 3000*30/100 + 3780*30/100 +4320*45/100 + 4770*45/1000 + 5400*45/100 = 8554.5

percentage change in total income in the first period to second period(excluding Billys)

first year total income = 16917 second year total income excluding billys = 21270-3000= 18270

change in income = 18270 - 16917 = 1353 percentage change in income = 1353/16917*100 = 7.99%, approx 8%.

taxes act as a automatic stablizer - As we know automatic stablizer act as a fiscal policy to counter fluctions in the economy growth of a country through taxes. When income increases from first period to the second period the collection of tax is also increases. So it help to serve economic cycle of the country without further government action.

Billy earned a job in the second period acts as a automatic stablizer because automatic stablizer take more money out of the economy in form of taxes during period of rapid growth and higher income and put more money back into the economy in the form of government spending and subsidy policy run by the government