Q.2. In the development of the Keynesian cross it is assumed that taxes are lump sum but in many countries (including Pakistan) taxes depend on income. Let's represent the tax system by writing tax revenue as T= T+ SY Where Tand are parameters of the tax code. The parameter is the marginal tax rate: if income rises by $1, taxes rise by $1. a. How does this tax system change the way consumption responds to changes in GDP? b. Mathematically derive government-purchases multiplier with the tax system given above. c. Mathematically derive the slope of the IS curve with the above given tax system.
Q.2. In the development of the Keynesian cross it is assumed that taxes are lump sum but in many countries (including Pakistan) taxes depend on income. Let's represent the tax system by writing tax revenue as T= T+ SY Where Tand are parameters of the tax code. The parameter is the marginal tax rate: if income rises by $1, taxes rise by $1. a. How does this tax system change the way consumption responds to changes in GDP? b. Mathematically derive government-purchases multiplier with the tax system given above. c. Mathematically derive the slope of the IS curve with the above given tax system.
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Transcribed Image Text:Q.2. In the development of the Keynesian cross it is assumed that taxes are lump sum but in many countries (including
Pakistan) taxes depend on income. Let's represent the tax system by writing tax revenue as T=T+ G%, Where Tand
are parameters of the tax code. The parameter is the marginal tax rate: if income rises by $1, taxes rise by $1.
a. How does this tax system change the way consumption responds to changes in GDP?
b. Mathematically derive government-purchases multiplier with the tax system given above.
c. Mathematically derive the slope of the IS curve with the above given tax system.
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