Question

In: Economics

All else equal, an increase in taxes will cause Group of answer choices a.) a decrease...

All else equal, an increase in taxes will cause

Group of answer choices

a.) a decrease in National Income.

b) a decrease in the government's budget surplus.

c) An increase in disposable income.

d) all of the above.

Expert Solution

Explanation:

We know,

Y= National Income

T=Tax

G= Government Expenditure

Y=a+b(Y-T)+I+G

dY= bdY-bdT

dY(1-b)=-bdT

dY/dT=- b/(1-b) <0

Here, in the above equation b is the Marginal Propensity To Consume(MPC) and 0<b<1.

As tax increases disposable income declines as a result there occurs a reduction in consumption.As G and I are exogenously given due to fall in consumption national income falls.

All else equal, an increase in taxes will cause

a.) a decrease in National Income.

Rahul Sunny answered 2 years ago

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