07 Jun Question So far in the chapter, we have been ass
Question
So far in the chapter, we have been assuming that the fist policy variable T is independent
of the level of income. In the real world, however, this is not the case. Taxes typically
depend on the level of income, so tax revenue tends to be higher when income is higher.
IN this problem, we examine how this automatic response of taxes can help reduce the
impact of changes in autonomous spending on output. Consider the following model of
the economy, where G and I are both constant. C = c0+ c1YD T = t0+ t1Y YD= Y – T
a.Is t1 greater or less than one? Explain.
b.Solve for equilibrium output.
c.What is the multiplier? Does the economy respond more to changes in autonomous spending when t1 is zero or when t1 is positive? Explain.
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