Taxmania is a closed economy with government. Aggregate demand is described by Y = C +I + G, where C denotes aggregate consumption, I denotes investment and G denotes government expenditure. Disposable income is denoted by Y,; income in Taxmania is taxed at a rate t, while the government can also deduct taxes as a lump sum T. In particular: C = 40 + 0.8YD Yр 3D (1 — t)Y — Т I = 200 – 6r G = 360 t = 0.25 T = 0 (a) Explain briefly what the IS curve represents and find its equation for Taxmania. (b) Find the multiplier for Taxmania and explain its meaning. What does it depend on? (c) The central bank of Taxmania targets the real interest rate and has set r = 4. Use the IS-LM framework to find the level of output in the economy. Show that Taxmania has a balanced budget.

Taxmania is a closed economy with government. Aggregate demand is described by Y = C +I + G, where C denotes aggregate consumption, I denotes investment and G denotes government expenditure. Disposable income is denoted by Y,; income in Taxmania is taxed at a rate t, while the government can also deduct taxes as a lump sum T. In particular: C = 40 + 0.8YD Yр 3D (1 — t)Y — Т I = 200 – 6r G = 360 t = 0.25 T = 0 (a) Explain briefly what the IS curve represents and find its equation for Taxmania. (b) Find the multiplier for Taxmania and explain its meaning. What does it depend on? (c) The central bank of Taxmania targets the real interest rate and has set r = 4. Use the IS-LM framework to find the level of output in the economy. Show that Taxmania has a balanced budget.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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