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What is the multiplier

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Reference no: EM132631712

Suppose an economy is closed and given by the following equations:Y = C + I + GC = c0 + c1 (Y - T) G and I are both constant

Assume that the tax function is a linear relation. The relation between tax and output is characterized by two parameters, t0 and t1:

  • The parameter t1 gives the effect an additional dollar of output has on the total tax. t1 is positive: An increase in output leads to an increase in the total tax.
  • The parameter t0 is what the tax in the economy would be if output in the current year were equal to zero.

a). Solve for equilibrium output.

b). What is the multiplier? Does output tend to vary more or less with changes in autonomous spending in this case as compared to the case where the tax is a fixed amount? Explain.

Reference no: EM132631712

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