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Consider the following closed economy, C=480+0.8(YT),Pp=100,G=20, where C,Y,T and Ip
stand for consumption expenditure, gross (pre-tax) income, taxes, planned investment
expenditure and government expenditure respectively. Find the equilibrium levels of income,
consumption and tax revenue under (i) the pure income-tax policy when T=0.25Y, and (ii) the
pure consumption-tax policy when T=0.25C. Which tax policy would yield a higher level of
income? Which policy would yield a higher level of consumption? Which policy would yield
bigger tax revenue?

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Consider the following closed economy, C=480+0.8(YT),Pp=100,G=20, w.pdf

  • 1. Consider the following closed economy, C=480+0.8(YT),Pp=100,G=20, where C,Y,T and Ip stand for consumption expenditure, gross (pre-tax) income, taxes, planned investment expenditure and government expenditure respectively. Find the equilibrium levels of income, consumption and tax revenue under (i) the pure income-tax policy when T=0.25Y, and (ii) the pure consumption-tax policy when T=0.25C. Which tax policy would yield a higher level of income? Which policy would yield a higher level of consumption? Which policy would yield bigger tax revenue?