Graphical treatment of taxes and fiscal policy

The main difference between variable taxes and fixed taxes is that unlike variable taxes, fixed taxesdo not vary with GDP .

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 variable 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.

Homework: Managing Aggregate Demand: Fiscal Policy Use the green points (triangle symbols) to draw the new total expenditure line on this graph given the tax increase through a variable tax previously discussed and subsequent changes in the consumption schedule shown on the preceding graph. 100 45-degree line 90 80 TE with tax increase through a variable tax 70 Total Expenditure 60 TE with tax increase through a fixed tax 50 REAL EXPENDITURE (Billions of dollars) 40 30 20 10 0 10 20 30 40 50 60 80 90 100 REAL GDP (Billions of dollars) Suppose that the government also considered a fixed tax hike and that the resulting consumption schedule would have also passed through one 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 consumptionHomework: Managing Aggregate Demand: Fiscal Policy Hint: The new consumption schedule must pass through one point on the left and one point on the right. ? 50 + Consumption with Tax Increase through a Variable Tax 40 30 Consumption with Tax Increase through a Fixed Tax + REAL CONSUMER SPENDING (Billions of dollars) 20 10 0 100 20 40 60 80 REAL GDP (Billions of dollars) The blue line on the next graph represents the original total expenditure line for this economy before the change in tax structure