NO ARABLBATY DEMAND FORD - hives Tases that do but change when GDP changes are called Earlier we had -Daves Understanding the difference between fixed and variable taxes is imporun hey we had assured that all terms except AC/AGDP were zero. Let us look more closely at up term. It is useful ba cefal m note that for understanding how to model changes in taxes on the income-expenditure diagram and for und SCAGDP - (AC/ADD (ADV/&GDP) standing how income takes affect the value of the multiplier. The first term We have seen that the multiplier process arises because any autonomous increase in spending first term on the right-hand side of the equal sign is the marginal propensity to consume, With only fixed taxes means higher income for those who supply the newly demanded goods. These higher incumes of fixed taxes, the second term will equal 1.0. If there are variable taxes, the second term is Greater than/cq when/equalto/less than) 1:0 and the slope of the expenditure schedule is less than the marginal lead to more consumption spending, and an on, and so on. This process continues to take place, propensity to co way to consume. ! (9) it is important to remember that each round of spending produces an increase in income before tank Modeling the welding the impact of a change in taxes will depend upon whether the change is in the fixed or With variable raxes some of the increase in before-tas income goes to pay taxes, and after-tax incrane variable compor We component of taxes. A reduction in fixed taxes would increase disposable income, and thus (6) (or disposable income) will increase by (more/less) than if there were only fixed taxes. Thus, each consumption, b nation, by the same amount at every level of GDP. Thus, it can be modeled as a parallel shift induced round of consumption spending will be (smaller/larger) than before. in the expendin a de expendi aditure schedule, A change in variable taxes would be a change in the tax rate and leads to ummarize, in an economy with income taxes (and transfer payments) that vary with income change in the beage in the slope of the expenditure schedule. Following a reduction in tax rates, the expenditure each round in the multiplier process will be smaller than before, and thus the multiplier effect to schedule would chedude would become (latter/steeper). (7) income, from any increase in a (10) ous spending, will be (smaller/larger) than before. The impact Let us be n Let us be more specific about how we can model a change in the fixed component of taxes. of income taxes on the multiplier is another important reason why our earlier formula for the mulu- (Changes in tn plier, 1/(1 - MPC), was oversimplified. Changes in transfer payments will have similar but opposite effects since transfer payments can be viewed as neg mesed as negative taxes.) We saw earlier that a $1 change in government purchases will shift the We can see these same results graphically on the income-expenditure diagram. Up to now we have expenditure s endinme schedule by $1. Consider a permanent SI reduction in the fixed component of income ssumed that races did not vary with income, that is, earlier models considered only fixed taxes. A SI taxes. What is wes. What is the magnitude of the initial shift of the expenditure schedule that initiates the multi- change in GDP meant a SI increase in disposable income and led to an increase in consumption plier process? spending given by the MPC. Since in these models consumption spending was the only type of spend- Her process? It is the initial impact on consumption spending that determines the magnitude of the shift in the e ing that changed when GDP changed, the slope of the expenditure schedule was equal to the sit in the expenditure schedule. Our discussion of the consumption function showed that a SI 18 increase in d Now when we consider the impact of variable taxes, we see that a $1 increase wifeise in disposable income will increase consumption spending by less than $1 because the in GDP leads to u(n) (smaller/equallarger) increase in disposable income and a(D) is (less than/equal to/greater than) 1.0. The result is that a SI change in the fixed compo- (11) ment of taxes increase in consumption spending as compared with the case of fixed taxes. The set of taxes shifts the expenditure schedule by (less/more) than a $1 change in government purchases. result is a (flatter/steeper) expenditure schedule. As a result, result, the multiplier associated with changes in income taxes will be (larger/smaller) than the myluplier as As we saw earlier, the multiplier can be derived from the slope of the expenditure schedule. The watplies asociated with changes in government purchases. slope of the expenditure schedule can be written ns Slope of the Expenditure Schedules This analy sed ACIAGDP , A//GDP . AG/AGDP , AVAGDP - AIM/AGDP Spending increa the helps and fee hoes induced spending affects the slope of the expenditure schedule. For cumple If wreports locks de on abad COP ingress then ADAGDP will be greater than zero and the expenditure schedule will by expo the will be der Moser sith increases in CDP, then s/ D&GDP will be greater than zero ual the shape of the expending thed