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.

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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

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.

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