Calculate and sign the tax multiplier (dY/dt) in the following model. Y = C[(1-t)Y] + I[...
Calculate and sign the tax multiplier (dY/dt) in the following model. Y = C[(1-t)Y] + I[ i ] + G M = L[i, (1-t)Y]
Homework Answers
Here, Y = C[(1-t)Y] + I[i] + G
Taking a total differential of Y
dY = 
C/
T[dY
- tdY] + dG ...... Since I is not a function of T (income is not a
function of taxes), it's derivative will be zero
dY = bdY - btdY + dG ..... Where b =
C/T
[ 1- b + bt] dY = (1-b) dG
dY/dG
= 1-b/ (1-b+bt)
dY/dT
= 1-b/ (1-b+bt) where b =
C/T
The tax multiplier always has a negative sign becuase as tax decreases, income increases
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