Table 10.1 $$\begin{array} { | l | l | } \hline \text { Consurmpticn } & C = \$ 1.0 + 0.75 \mathrm { YD } \ \hline \text { Irvestmernt } & = \$ 1.9 \ \hline \text { Goverument purchases } & = \$ 2 \ \hline \text { Net exports } & = - \$ 0.5 \ \hline \text { Taxes } & = \$ 0 \ \hline \text { Goverument trarssfer } & \ \text { gayments } & = \$ 0 \end{array}$$ (all values are in billions of dollars) -Refer to Table 10.1.Suppose that all of the information given in the table remains the same except that taxes equal $0.5 billion.If potential GDP equals $17 billion,by how much would taxes have to decrease for equilibrium GDP to equal potential GDP? A) $1.9 billion B) $0.3 billion C) $1.5 billion D) $5 billion

Question

Quizplus · Accepted Answer

To find the change in taxes needed, calculate the equilibrium GDP using the formula: GDP = C + I + G + NX. With taxes at $0.5 billion, disposable income YD = Y - T = Y - 0.5. The consumption function becomes C = 1.0 + 0.75(Y - 0.5). Solve for Y when GDP = potential GDP = $17 billion, then find the tax decrease needed to achieve this equilibrium. The correct decrease is $0.3 billion.

Table 101 (All Values Are in Billions of Dollars) -Refer to Table

Table 101 (All Values Are in Billions of Dollars)
-Refer to Table