Assume that, without taxes, the consumption schedule for an economy is as shown below.
GDP, Billions Consumption, Billions
$100 $120
200 200
300 280
400 360
500 440
600 520
700 600
(a) Graph this consumption schedule. What is the size of the MPC?
(b) Assume that a lump-sum regressive) tax $10 billion is imposed at all levels of GDP. Calculate the tax rate at each level of GDP. Graph the resulting consumption schedule and compare the MPC and the multiplier with those of the pretax consumption schedule.
(c) Now supposed a proportional tax with a 10 percent tax rate is imposed instead of the regressive tax. Calculate and graph the new consumption schedule and note the MPC and multiplier.
(d) Finally, impose a progressive tax such that the tax rate is 0 percent when GDP is $100, 5 percent at $200, 10 percent at $300, 15 percent at $400, and so forth. Determine and graph the new consumption schedule, noting the effect of this tax system on the MPC and the multiplier.
(e) Use a ling graph to show why proportional and progressive taxes contribute to greater economic stability, while a regressive tax does not.