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Although our development of the Keynesian model assumes that taxes are a fixed amount, in many countries taxes depend on income. Let's represent the tax
Although our development of the Keynesian model assumes that taxes are a fixed amount, in many countries taxes depend on income. Let's represent the tax system by writing tax revenue as T = T bar + tY, where t is a parameter which represents the marginal tax rate. That is, if income rises by $1, taxes rise by $t. a. How does this tax system change the way consumption response to changes in GDP? b. When real interest rates are fixed, how does this tax system alter the government-purchases multiplier? c. In the IS-LM model, how does this tax system alter the slope of the IS curve
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