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Consider the following simple model with investment and government spending exogenous: Disposable income Yd is given by Y T, where T is total taxes.

This question was answered on Jan 27, 2013. View the Answer
Consider the following simple model with investment and government
spending exogenous:
Disposable income Yd is given by Y  T, where T is total taxes. Suppose
that taxes are not directly related to income, so that T can be increased or
decreased independent of income.
a. Derive the change in Y associated with an increase in taxes T. Show
the results graphically and algebraically. What is the tax multiplier?
That is, what is Y/T?
b. Compare the tax multiplier with the government spending multiplier
derived in the text. Aside from the difference in signs, which is larger?
Why?
c. Now increase government spending G and taxes T by the same
amount. For this change, the government budget deficit G  T does
not change. If the budget was balanced before, it will still be balanced.
What happens to income Y in this case? Perhaps surprisingly, it increases.
Calculate by how much. That is, using algebra, calculate
Y/G; G  T. The result is called the balanced budget multiplier.
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Consider the following simple model with investment and government spending exogenous:
Disposable income Yd is given by Y - T, where T is total taxes. Suppose that taxes are not
directly related to...

This question was asked on Jan 26, 2013 and answered on Jan 27, 2013.

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