6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a fixed tax. Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes. Hint: The new consumption schedule must pass through one point on the left and one point on the right. Consumption with Tax Increase through a Fixed Tax Consumption with Tax Increase through a Variable Tax Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the tax increase through a fixed tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. Suppose that the government also considered a variable tax hike and that the resulting consumption schedule would have also passed through one black point (plus symbols) on the left and one black point on the right on the first graph (though not necessarily the same points as the consumption schedule resulting from the tax increase through a fixed tax). On the first graph, use two purple points (diamond symbol) to connect the two black points (plus symbols) representing the consumption schedule that would result from a tax increase through a variable tax. (Hint: As before, the consumption schedule must pass through one point on the left and one point on the right.) On the second graph, use the purple points (diamond symbols) to draw the total expenditure line that would result from a tax increase through a variable tax indicated on the top graph. True or False: The change in equilibrium output is smaller when the government implements the variable tax hike. True False 6. Graphical treatment of taxes and fiscal policy The main difference between variable taxes and fixed taxes is that unlike fixed taxes, variable taxes The following graph shows the consumption schedule for an economy with a given level of taxes. Suppose the government implements a tax increase through a fixed tax. Use two green points (triangle symbol) to connect the two black points (plus symbols) representing the consumption schedule after the change in taxes. Hint: The new consumption schedule must pass through one point on the left and one point on the right. Consumption with Tax Increase through a Fixed Tax Consumption with Tax Increase through a Variable Tax Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the tax increase through a fixed tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. Suppose that the government also considered a variable tax hike and that the resulting consumption schedule would have also passed through one black point (plus symbols) on the left and one black point on the right on the first graph (though not necessarily the same points as the consumption schedule resulting from the tax increase through a fixed tax). On the first graph, use two purple points (diamond symbol) to connect the two black points (plus symbols) representing the consumption schedule that would result from a tax increase through a variable tax. (Hint: As before, the consumption schedule must pass through one point on the left and one point on the right.) On the second graph, use the purple points (diamond symbols) to draw the total expenditure line that would result from a tax increase through a variable tax indicated on the top graph. True or False: The change in equilibrium output is smaller when the government implements the variable tax hike. True False
