G following macroeconomic modely c i0 g0

Reference no: EM13377910

Given the following macroeconomic model:

Y = C + I0 + G0 Equilibrium Income (Y)

C = a + b(Y-T) Consumption with Taxes (T), where: a > 0, 0 < b < 1

T = d + tY Tax function, where: d > 0, 0 < t < 1

Note: I0 = exogenous income, G0 = exogenous govt. spending.

Question: Discuss the effect (increase or decrease) of an increase in the tax rate, t, on the equilibrium income Y* using the effect of increasing t on the equilibrium solution.

Reference no: EM13377910

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