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Q3 [30 points]: In Lecture 3 we have assumed that the fiscal policy variables G and T the level of income. In the real world,

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Q3 [30 points]: In Lecture 3 we have assumed that the fiscal policy variables G and T the level of income. In the real world, however, this is not the case. Taxes typically dep income and so tend to be higher when income is higher. In this problem, we examine response of taxes can help reduce the impact of changes in autonomous spending on out Consider the following behavioral equations: Z =C+I +G C = Co + GYD T=to +tY YD = Y - T G and / are both constant. Assume that to is between 0 and 1; 0

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