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

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

Chapter9: Demand-side Equilibrium: Unemployment Or Inflation?

Section9.A: The Simple Algebra Of Income Determination And The Multiplier

Problem 4TY

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Question

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 Y_n). Make the necessary calculations for the t_o policy that it should institute; who does what? Provide the full name of this policy.

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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