6. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + bYa 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. a) What is the new expression for disposable income? b) What is the new expression for the consumption function? c) What is the equilibrium level of output Y? 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?

6. Assume a closed economy with exogenous investment I and government spending G. The consumption function is as follows: C = a + bYa 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. a) What is the new expression for disposable income? b) What is the new expression for the consumption function? c) What is the equilibrium level of output Y? 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?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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