Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let’s represent the tax system by writing tax revenue as T = T− + tY, where T− and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t × $1. 1.How does this tax system change the way consumption responds to changes in GDP? 2. Im the Keynesian cross, how does this tax system alter the government purchases multiplier? 3. In the IS–LM model, how does this tax system alter the slope of the IS curve? (solve all three tasks)
Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with
T = T− + tY,
where T− and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by $1, taxes rise by t × $1.
1.How does this tax system change the way consumption responds to changes in
2. Im the Keynesian cross, how does this tax system alter the government purchases multiplier?
3. In the IS–LM model, how does this tax system alter the slope of the IS curve?
(solve all three tasks)
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