Describe how taxes that depend positively on real GDP reduce the size of the multiplier and act as an automatic stabilizer for the economy 

  

Let's look a little more closely at the mathematics of how this works. Let's assume that the government "captures" a fraction t of any increase in real GDP in the form of taxes, where t, the tax rate, is a fraction between 0 and 1. Consider the effects of a $100 billion increase in investment spending. (this will hold to any change in autonomous aggregate spending) in a close economy without any transfers. (a) State the equation for change in disposable income: (b) Fill out the following table. (Hint: remember that you consume fraction of your disposable income (after tar), and you have to pay taxes on all your additional income Round 1 2 3 4 Total: Change in GDP Increase in investment spending Second-round increase in consumer spending Third-round increase in consumer spending Fourth-round increase in consumer spending Amount of change in GDP