2- Assume an economy with the following variables: YN = 18,500; t = 23% ; YA = 1

Question

2- Assume an economy with the following variables: YN = 18,500; t = 23% ; YA = 16,650; G = 6,500 ; Ta = 700.

a) Compute the amount of taxes at actual GDP and express it as a percent of actual GDP.

b) Compute the amount of taxes at natural GDP and express it as a percent of natural GDP.

c) Policymakers decide to reduce the actual deficit to 6% of the natural GDP. What will be the size of the actual deficit under these conditions?

d) Given no change in the tax rate t, compute by how much they should cut G to accomplish their goal in question c.

e) Given no change in G, what should be the tax rate in order to accomplish the policy goal in question c.

f) Suppose you are asked to make a policy recommendation that requires you to increase the tax rate (from 23%) and decrease government spending. What combination of tax rate and spending cut would you recommend to meet the policymakers’ goals in question c? Answers may vary.

I am looking for help on E and F only

Explanation / Answer

(a)

Tax = Ta + t x YA = 700 + 0.23 x 16,650 = 700 + 3,829.5 = 4,529.5

Tax as % of Actual GDP = Tax / YA = 4,529.5 / 16,650 = 0.2720 = 27.20%

(b)

Tax = Ta + t x YN = 700 + 0.23 x 18,500 = 700 + 4,255 = 4,955

Tax as % of Natural GDP = Tax / YN = 4,955 / 18,500 = 0.2678 = 26.78%

(c)

Target Size of actual deficit = 6% x YN = 6% x 18,500 = 1,110

(d)

Current size of actual deficit = YN - YA = 18,500 - 16,650 = 1,850

Required decrease in deficit = Current deficit - Target deficit = 1,850 - 1,110 = 740

Required cut in G = Required decrease in deficit = 740

NOTE: As per Chegg answering policy, 1st 4 parts are answered.

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