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Chapter 19: Problem 6

Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income?

Short Answer

Expert verified
An increase in personal income tax collections will decrease disposable personal income while keeping national income and personal income unchanged, given that GDP remains the same.

Step by step solution

01

Understand the Concepts

National income is the total income of a nation's residents, while personal income refers to individuals' earnings. Disposable personal income is personal income minus personal tax and non-tax payments, representative of the income available to individuals for personal consumption, saving, and investing. Gross Domestic Product (GDP) represents the total value of all goods and services produced within a country in a given period, which incorporates national income.
02

Consider the Effects of Increased Personal Income Taxes

When the federal government collects more in personal income taxes, it implies that individuals' disposable personal income will decrease because they are paying more taxes. However, the level of personal income remains unaffected; only the portion taken as tax, altering disposable income, changes. National income and GDP also remain unchanged as they are not influenced directly by variations in personal tax rates.
03

Summarize the Impacts

An increase in personal income tax collections by the federal government, while the level of GDP remains constant, will lead to a decrease in disposable personal income, as more money from their earnings is going towards tax payments. However, this won't affect the values of national income and personal income, these figures will remain constant as the overall income doesn't change, only the distribution does.

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Most popular questions from this chapter

What is meant by a firm's "value added"?

In the circular flow of income, why must the value of total production in an economy equal the value of total income?

As of 2017,19 countries in Europe had adopted the euro as their common currency. These countries are called the euro zone. According to an article in the Economist, "The euro zone's GDP grew at an annualized rate of around \(2 \%\) in the first quarter." Is it likely that the article is referring to the growth in nominal GDP or the growth in real GDP? Briefly explain.

Which of the following are likely to increase measured GDP, and which are likely to reduce it? a. The fraction of women working outside the home increases. b. There is a sharp increase in the crime rate. c. Higher tax rates cause some people to ask to be paid in cash so they can hide more of the income they earn.

Ireland is one of the few countries where GDP and GNP differ significantly. Using GDP per person, Ireland has the third-highest income per person in Europe. An article on the Financial Times website stated, "With GDP being about 20 percent larger than GNP, Irish people appear (when using GDP per person) to be richer than what they feel they are." Briefly explain the author's reasoning.
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