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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.
 Spring '09
 LYONS
 Macroeconomics

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