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# section+14 - ECON 101B Section 14 Handout Date Question 1...

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ECON 101B: Section 14 Handout Date: 03/04/2011 Question 1 Use the Keynesian cross to predict the impact of 1. An increase in government purchases. 2. An increase in taxes. 3. An equal increase in government purchases and taxes Question 2 Although our development of the Keynesian cross in this chapter assumes that taxes are a °xed amount, in many countries (including the United States) taxes depend on income. Let±s represent the tax system by writing tax revenue as T = ° T + tY where ° T and t are parameters of the tax code. The parameter t is the marginal tax rate: if income rises by \$1, taxes rise by t ° \$1. 1. How does this tax system changes the way consumption responds to changes in GDP? 2. In the Keynesian cross, how does this tax system alter the government-purchases multiplier? 3. In the IS-LM, how does this tax system alter the slope of the IS curve? Question 3 Consider the impact of an increase in thriftiness in the Keynesian cross. Suppose the consumption function is C = ° C + c ( Y ± T ) ; where ° C

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