The government-purchase multiplier

Reference no: EM13914258

Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, in many countries taxes depend on income. 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 x $1.

a. How does this tax system change the way consumption responds to changes in GDP?

b. In the Keynesian cross, how does this tax system alter the government-purchase multiplier?

c. In the IS-LM model, how does this tax system alter the slope of the IS curve?

Reference no: EM13914258

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The government-purchase multiplier : Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, in many countries taxes depend on income.In the Keynesian cross, how does this tax system alter the government-purchase multiplier.

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