In: Economics
1. Imagine that the Canadian economy in 2016 could be described by the following demand determined model:
Consumption: C = a + bYd + θW
Investment: I = I0
Government Purchases: G = G0
Exports: X = X0
Imports: IM = mY
Tax Revenue: T = τ + tY
Where: a is autonomous consumption, b is the marginal propensity to
consume out of disposable income, W is wealth, θ is the marginal
propensity to consume out of wealth, m is the marginal propensity
to import, τ are lump-sum taxes, and t is the tax rate.
(a) Algebraically solve for the equilibrium level of national income, the simple multiplier & draw a diagram of the equilibrium. Make sure to show all your steps, and label all important points on your graph. Total of 7 Marks (5 marks for algebra, 2 marks for graph)
(b) The real value of Canadian households’ principal residence increased three-fold from 1999-2016 and represented about 36% of household assets. Discuss (using the aid of a diagram) what would happen if housing prices fell in this economy. Total of 7 Marks (4 marks for explanation, 3 marks for graph)
For parts (c) and (d), imagine the Canadian economy is
characterized by the following parameter values:
Consumption: C = 200 + .75Yd + 0.05W
Investment: I = 350
Government Purchases: G = 75
Exports: X = 125
Imports: IM = 0.2Y
Tax Revenue: T = 100 + 0.1Y
Wealth: W = 1000
The government wants to decrease equilibrium national income by $10 billion using taxation. This model allows two possible tax policies: i. Changes to lump-sum taxes (τ) ii. Changes to the tax-rate (t)
(c) If the government wanted to decrease national equilibrium by $10billion solely through changes to lump-sum taxes(τ), how should they alter their lump-sum taxes? Assume no other changes would take place. Complete answers should include both your calculations and a diagram illustrating what is happening. Total of 7 Marks (2 marks for graph, 5 marks for algebra/explanation)
(d) If the government wanted to decrease national equilibrium by $10billion solely through changes to the proportional tax rate(t), how should they alter their tax rate? Assume no other changes would take place. Complete answers should include both your calculations and a diagram illustrating what is happening. Total of 7 Marks (2 marks for graph, 5 marks for algebra/explanation)
Imagine that the Canadian economy in 2016 could be described by the following demand determined model:
Consumption: C = a + bYd + θW
Investment: I = I0
Government Purchases: G = G0
Exports: X = X0
Imports: IM = mY
Tax Revenue: T = τ + tY
Where: a is autonomous consumption, b is the marginal propensity to
consume out of disposable income, W is wealth, θ is the marginal
propensity to consume out of wealth, m is the marginal propensity
to import, τ are lump-sum taxes, and t is the tax rate.
(a) Algebraically solve for the equilibrium level of national income, the simple multiplier & draw a diagram of the equilibrium. Make sure to show all your steps, and label all important points on your graph.
(b) The real value of Canadian households’ principal residence increased three-fold from 1999-2016 and represented about 36% of household assets. Discuss (using the aid of a diagram) what would happen if housing prices fell in this economy.
Y= C + I + G + (x- m)
Y = 200+0.75(y - 100-0.1y)+0.05(1000)+350+75+125+0.2y
Y= 200+0.75y - 75 - 0.075y +50+ 350 +200 - 0.2y
Y- 0.75y +0.075y +0.2y =725
0.525 y = 725
Y = 725/0.525
Y = $ 1380 billion
For parts (c) and (d), imagine the Canadian economy is
characterized by the following parameter values:
Consumption: C = 200 + .75Yd + 0.05W
Investment: I = 350
Government Purchases: G = 75
Exports: X = 125
Imports: IM = 0.2Y
Tax Revenue: T = 100 + 0.1Y
Wealth: W = 1000
The government wants to decrease equilibrium national income by $10 billion using taxation. This model allows two possible tax policies: i. Changes to lump-sum taxes (τ) ii. Changes to the tax-rate (t)
(c) If the government wanted to decrease national equilibrium by $10billion solely through changes to lump-sum taxes(τ), how should they alter their lump-sum taxes? Assume no other changes would take place. Complete answers should include both your calculations and a diagram illustrating what is happening.
(d) If the government wanted to decrease national equilibrium by $10billion solely through changes to the proportional tax rate(t), how should they alter their tax rate? Assume no other changes would take place. Complete answers should include both your calculations and a diagram illustrating what is happening.