Government expenditures (G): $160, $160, $160, $160, $160 Tax Revenues (T): $100

Question

Government expenditures (G): $160, $160, $160, $160, $160
Tax Revenues (T): $100, $120, $140, $160, $180
Real GDP: $500, $600, $700, $800, $900

A) What is the marginal tax rate?
The average tax rate?
Which of the following describes the tax system: proportional, progressive, regressive?

B) Suppose the above government is producing $600 of real GDP, whereas the potential real GDP (or full-employment real GDP) is $700. How large is its budget deficit?
Its cyclically adjusted budget deficit?
Its cyclically adjusted budget deficit as a percentage of potential real GDP?
Is the fiscal policy expansionary or is it contractionary?

Explanation / Answer

A) marginal tax rate = tax revenue/real GDP = 100/500 = 1/5 = 0.2 or 20%

average tax rate = average tax revenue/ average real gdp

= (100+120+140+160+180/5)/(500+600+700+800+900/5)

=700/4500 = 15.55%

proportional

B)budget deficit =600-120 =$480
cyclically adjusted budget deficit as a percentage of potential real GDP = 480/600 = 80%

fiscal policy is expansionary

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