Hugh Lucas

Business

24 April, 21:30

Although our development of the Keynesian cross in this chapter assumes that taxes are a fixed amount, most countries levy some taxes that rise automatically with national income. (Examples in the United States include the income tax and the payroll tax.) Let's represent this type of tax system by writing tax revenue (T) as T = T * + tY, where Y is income, T * is a lump-sum tax, and t is the marginal tax rate. When income rises by $1, the value of new taxes collected is t * $1.

A. How does this tax system change the way consumption responds to changes in GDP?

B. In the Keynesian cross, how does this tax system alter the government-purchase multiplier?

C. In the IS-LM model, how does this tax system alter the slope of the IS curve?