Lecture7

Lecture7

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Unformatted text preview: )Y (16) Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 40 / 43 Endogenous Taxes and Imports Aggregate Expenditures The slope of the aggregate expenditure is now (MPC − MPC × t1 − v ). Suppose there is \$1,000 increase in income, the tax rate is t1 = 0.2, the marginal propensity to import is v = 0.1, and the MPC = 0.8. Under the simple model a \$1,000 increase in income would have resulted in an additional \$800 in consumption. Now the household must ﬁrst pay taxes of 20%. This leaves them with \$800. Of the \$800 they will consume 80% or \$640, but of the \$640, some of this is imports. According the marginal propensity to import the household purchased 0.1 ∗ 1000 of foreign goods. The net eﬀect on consumption is only \$540. Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 41 / 43 Endogenous Taxes and Imports Taxes Rates and MPI (Figure 10.11) Figure : Endogenous Taxes and Imports Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 42 / 43 Endogenous Taxes and Imports Introduction The next step is to see how this change will aﬀect equilibrium income. Recall Y = PAE . Substituting for PAE: Y = [C − (MPC )t0 + I + G + X − u ] + (MPC − MPC × t1 − v )Y Solving for Y: Y − (MPC − MPC × t1 − v )Y = [C − (MPC )T + I + G + NX ] or Y (1 − MPC + MPC × t1 + v ) = [C − (MPC )T + I + G + NX ] Dividing both sides by (1 − MPC + MPC × t1 + v ): Y= 1 [C − (MPC )T + I + G + NX ] (17) 1 − MPC + MPC × t1 + v Ryan W. Herzog (GU) Aggregate Expenditures February 25, 2014 43 / 43...
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This document was uploaded on 03/18/2014 for the course ECON 202 at Gonzaga.

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