5. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + by where Ya is households' disposable income. But instead of a head tax the government levies a proportional income tax, with the income tax rate given by t where 0 < t < 1. d) What is the government spending multiplier in this case? (Hint: It's the derivative of income Y with respect to G.) e) Is this multiplier smaller or larger compared with the multiplier with a simple head tax T?
5. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + by where Ya is households' disposable income. But instead of a head tax the government levies a proportional income tax, with the income tax rate given by t where 0 < t < 1. d) What is the government spending multiplier in this case? (Hint: It's the derivative of income Y with respect to G.) e) Is this multiplier smaller or larger compared with the multiplier with a simple head tax T?
Chapter19: The Keynesian Model In Action
Section: Chapter Questions
Problem 5SQP
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