Economics 101 Seadent ID S ( peints) There are two groups of households in the e

Question

Economics 101 Seadent ID S ( peints) There are two groups of households in the economy groups 111 and 12) Group [1] High-income families A lange share of their anevwual income is capital income eamings on thein financial assets Because this capital income can fluctuate a great deal from year-to-year, their spending is only weakly tied to their income As a result their mpe is about Q.1. They do not lose jobs in recession; they do nok gain jobs in recovery Group 12; All other families. The vast majority of their income is labor inceese. They have very low saving rates When they lose their jobs, they reduce spending: when they are re-hired, they increase spending Thry have 0s. Jobs that are eliminated or created as part of the business cycle are filled by workers in group 23 The govemment can cut taxes for some or all of the high income families. Or it can raise transter payments for some or all of the other families. The government cannot do both programs; it must choose. Both programs cost the same amount: $200 billion per year . Whether the government euts taxes by $200 bilion or lincreases transfer payments by $200 biltion, the initial effect on disposasble income is the same. By how mach does disposable incoene initially change b. If the govermment cuts tanxes, by how much will equilibrium income change? Show your work Page 3 of 5

Explanation / Answer

A since you have not present any tax rate the disposable income will change by full amount of 200 billion initially.

B quilbrium income will change by 1-c/c into change in tax= 1/0.9 multiplied by 200=222.22 billion

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