Consider a closed economy in which there are two groups of households: the rich and the poor. The poor earn only wages and the rich earn the rest of the national income. Suppose that the income earned by the two groups are Y, (for the rich) and Y, (for the poor), so that Y- Y + Y Suppose that the poor consume most of their income, while the rich save most of their income. Now recall that we define taxes, T, as net of transfers. In other words, T-Taxes Transfer Payments. Suppose that the government increases transfer payments to low-income households, paid by an increase in taxes on the high-income households. How does this policy acian CroEs

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Consider a closed economy in which there are two groups of houscholds: the rich
and the poor. The poor earm only wages and the rich earn the rest of the national income.
Suppose that the income earned by the two groups are Y (for the rich) and Y, (for the poor), so
8.
that Y=Y + Y Suppose that the poor consume most of their income, while the rich save most
of their income. Now recall that we define taxes, T, as net of transfers. In other words, T-Taxes
Transfer Payments. Suppose that the government increases transfer payments to low-income
households, paid by an increase in taxes on the high-income households. How does this policy
affect equilibrium output? Discuss the intuition and explain using the Keynesian-Cross
diagram.
!!
Transcribed Image Text:Consider a closed economy in which there are two groups of houscholds: the rich and the poor. The poor earm only wages and the rich earn the rest of the national income. Suppose that the income earned by the two groups are Y (for the rich) and Y, (for the poor), so 8. that Y=Y + Y Suppose that the poor consume most of their income, while the rich save most of their income. Now recall that we define taxes, T, as net of transfers. In other words, T-Taxes Transfer Payments. Suppose that the government increases transfer payments to low-income households, paid by an increase in taxes on the high-income households. How does this policy affect equilibrium output? Discuss the intuition and explain using the Keynesian-Cross diagram. !!
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