g. Suppose that taxes are not exogenous as suggested at the beginning of this task but, rather, endogenous and that they are proportional to the income earned by households according to the following expression: T = tY where 0 < t < 1 is the tax rate. In words, describe how this change would affect your IS/LM model and the equilibrium in the economy. Compute again the equilibrium output and interest rate you computed in b) but by assuming that taxes are now proportional to income and that the tax rate is 8% (t=0.08). Comment on your findings.

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Chapter1: Making Economics Decisions
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g. Suppose that taxes are not exogenous as suggested at the beginning of this task but,
rather, endogenous and that they are proportional to the income earned by households
according to the following expression: T=tY where 0 < t < 1 is the tax rate. In
words, describe how this change would affect your IS/LM model and the equilibrium
in the economy. Compute again the equilibrium output and interest rate you computed
in b) but by assuming that taxes are now proportional to income and that the tax rate
is 8% (t=0.08). Comment on your findings.
Transcribed Image Text:g. Suppose that taxes are not exogenous as suggested at the beginning of this task but, rather, endogenous and that they are proportional to the income earned by households according to the following expression: T=tY where 0 < t < 1 is the tax rate. In words, describe how this change would affect your IS/LM model and the equilibrium in the economy. Compute again the equilibrium output and interest rate you computed in b) but by assuming that taxes are now proportional to income and that the tax rate is 8% (t=0.08). Comment on your findings.
Consider a closed economy where the goods and money markets are described by the following relationships:
C = 500+ 0.8(Y – T)
I = 500 10r
M
P
= 0.1Y - 35r
G = 800
T =
200
M = 1000
P = 2
Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is
government purchases, M is the money supply, P is the price level and r is the interest rate.
Transcribed Image Text:Consider a closed economy where the goods and money markets are described by the following relationships: C = 500+ 0.8(Y – T) I = 500 10r M P = 0.1Y - 35r G = 800 T = 200 M = 1000 P = 2 Where C is planned consumption, I is planned investment spending, T is government tax revenues, G is government purchases, M is the money supply, P is the price level and r is the interest rate.
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