Answered: 1. a. You are studying an economy with…

1. a. You are studying an economy with an income tax rate, t1, of 32% and an MPS of 0.3. It is currently suffering from a "recessionary gap" of $500 m. (i.e., Eqm Y

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section11.A: Graphical Treatment Of Taxes And Fiscal Policy

Problem 2TY

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Question

1. a. You are studying an economy with an income tax rate, t1, of 32% and an MPS of 0.3. It is currently suffering
from a "recessionary gap" of $500 m. (i.e., Eqm Y<Y full employment, FE, aka Yn). Make the necessary calculations
for the to policy that it should institute; who does what? Provide the full name of this policy.
b. Compare this economy to one without income taxes to explain the term "automatic stabilizer." [Hint: Let I
change and compare the I multipliers in each of these economies.]

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