Aggregate Demand I: Building the IS LM Model-End of Chapter Problem Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed armunt, most countries levy some taxes that rise automatically with national income. Let's represent this type of tax system by writing tax revenue (7) as T=7*+tY, where Y is income, 7 is a lump-sum tax, and t is the marginal tax rate. When income rises by $1, the value of new taxes collected is tx$1. Use this information to answer the next three questions. a. How does this type of tax system change the way consumption responds to changes in GDP? The effect of an increase in income on consumption is b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier? The government-purchases multiplier becomes In the IS LM model, how does this tax system alter the slope of the IS curve? Activat Go to Set tion in the interest rate now has a impact on real output, making The IS curve

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Aggregate Demand I: Building the IS-LM Model-End of Chapter Problem
Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed armount, most countries levy
some taxes that rise automatically with national income. Let's represent this type of tax system by writing tax revenue (7) as
T=7* +tY,
where Y is income, 7* is a lump-sum tax, and t is the marginal tax rate. When income rises by $1, the value of new taxes
collected is t X $1. Use this information to answer the next three questions.
a. How does this type of tax system change the way consumption responds to changes in GDP?
The effect of an increase in income on consumption is
b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier?
The government-purchases multiplier becomes
c. In the IS LM model, how does this tax system alter the slope of the IS curve?
Activat
Go to Set
impact on real output, making The IS curve
A given reduction in the interest rate now has a
Transcribed Image Text:Aggregate Demand I: Building the IS-LM Model-End of Chapter Problem Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed armount, most countries levy some taxes that rise automatically with national income. Let's represent this type of tax system by writing tax revenue (7) as T=7* +tY, where Y is income, 7* is a lump-sum tax, and t is the marginal tax rate. When income rises by $1, the value of new taxes collected is t X $1. Use this information to answer the next three questions. a. How does this type of tax system change the way consumption responds to changes in GDP? The effect of an increase in income on consumption is b. In the Keynesian cross, how does this tax system alter the government-purchases multiplier? The government-purchases multiplier becomes c. In the IS LM model, how does this tax system alter the slope of the IS curve? Activat Go to Set impact on real output, making The IS curve A given reduction in the interest rate now has a
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