1. Suppose the households in a hypothetical economy has the following consumption function C= a + cYd. Where is the disposable income. The government in this economy imposes a tax rate of to households’ income (ex. A means that 10% of households’ income goes to tax payments). a. What is the equation that describes the disposable income of households? b. What is the Planned Expenditure Equation? Assume that government expenditure is exogenous and Investment function is given by the equation I = I-br Where is the interest rate. c. Derive the equilibrium output in the goods market and show that the multiplier in this model is 1/1c(1-t). d. How does and the tax rate affects this multiplier (e.g., what happens to multiplier if c increases cet.par. , or if tax rate increases, cet.par)?
1. Suppose the households in a hypothetical economy has the following consumption function C= a + cYd.
Where is the disposable income. The government in this economy imposes a tax rate of to households’ income (ex. A means that 10% of households’ income goes to tax payments).
a. What is the equation that describes the disposable income of households?
b. What is the Planned Expenditure Equation? Assume that government expenditure is exogenous and Investment function is given by the equation
I = I-br
Where is the interest rate.
c. Derive the equilibrium output in the goods market and show that the multiplier in this model is 1/1c(1-t).
d. How does and the tax rate affects this multiplier (e.g., what happens to multiplier if c increases cet.par. , or if tax rate increases, cet.par)?
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