tutorial4 - Department of Economics Queen's University...

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Department of Economics Queen’s University Econ320: Macroeconomic Theory II Instructor: Afifa Khazri Tutorial 4 Long Questions 1. Although our development of the Keynesian cross assumes that taxes are a fixed 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 dollar, taxes rise by t * 1 dollars. 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-purchases multiplier? 2. Consider a two period-lived household that chooses consumption and labour supply in each period to maximise U = u ( c 1 ,l 1 ) + βu ( c 2 ,l 2 ) where u ( c t ,l t ) = lnc t + bln (1 - l t ) and b > 0. There is no uncertainty and the household faces the dynamic budget constraints given by c 1 + s = w 1 l 1 1
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tutorial4 - Department of Economics Queen's University...

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