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For simplicity, we normally treat aggregate tax payments (T) as determined by politics or other factors unrelated to output. However, suppose that aggregate tax payments
For simplicity, we normally treat aggregate tax payments (T) as determined by politics or other factors unrelated to output. However, suppose that aggregate tax payments are proportional to income. That is, T = t Y, where t is the marginal tax rate and is between 0 and 1.
- How, if at all, would this change in our assumptions affect the Keynesian cross diagram?
- Would this change increase, decrease, or have no impact on the multiplier effect, or is it not possible to tell? (That is, how would the effect of a given vertical shift of the planned expenditure line compare with what it was before?)
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