The economy is described by the following functions: Shown in Picture where ?t is the tax rate. Here, the amount of taxes collected depends positively on the gross income. Find the multiplier associated with government purchases. How does this multiplier compare with a model with lump-sum taxes? Why is it lower?
The economy is described by the following functions: Shown in Picture where ?t is the tax rate. Here, the amount of taxes collected depends positively on the gross income. Find the multiplier associated with government purchases. How does this multiplier compare with a model with lump-sum taxes? Why is it lower?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The economy is described by the following functions: Shown in Picture
where ?t is the tax rate. Here, the amount of taxes collected depends positively on the gross income.
Find the multiplier associated with government purchases. How does this multiplier compare with a model with lump-sum taxes? Why is it lower?
Transcribed Image Text:The image presents a set of economic equations used to represent different components in a macroeconomic model. Here is the transcription and explanation of each equation:
1. \( C = \overline{C} + c \cdot YD \)
This equation represents the consumption function. \( C \) is total consumption, \( \overline{C} \) is autonomous consumption (consumption that does not depend on income), \( c \) is the marginal propensity to consume (the increase in consumption with respect to an increase in disposable income), and \( YD \) is disposable income.
2. \( Tx = t \cdot Y \)
This equation represents taxes. \( Tx \) is total tax revenues, \( t \) is the tax rate, and \( Y \) is national income.
3. \( Tr = \overline{Tr} \)
This equation indicates that transfers (\( Tr \)) are constant and equal to \( \overline{Tr} \).
4. \( I = \overline{I} \)
This equation shows that investment (\( I \)) is constant, denoted by \( \overline{I} \).
5. \( G = \overline{G} \)
This equation signifies that government spending (\( G \)) is constant and represented by \( \overline{G} \).
6. \( Nx = \overline{Nx} \)
This equation indicates that net exports (\( Nx \)) are constant, defined as \( \overline{Nx} \).
These equations are components of a basic economic model used to study aggregate demand and supply in an economy. They highlight how various factors such as consumption, investment, and government policies impact economic activity.
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