Answered step by step
Verified Expert Solution
Question
...
1 Approved Answer
Question 2 This question illustrates the workings of automatic stabilisers. Suppose the components of planned spending in an economy are given by: C=C 0 +c(Y-T)
Question 2
This question illustrates the workings of automatic stabilisers. Suppose the components of planned spending in an economy are given by:
- C=C0+c(Y-T)
- Ip =I0
- G=G0
- T=tY
- M=mY
- X=X0
- m=0
wheretis the tax rate andm the marginal propensity to import is zero (i.e.M = 0). In this economy, the tax system acts as an automatic stabiliser, because tax revenues automatically decline when national income falls.
- Solve for an equation that determines the short-run equilibrium output for this economy.
- Find the expression for the multiplier, i.e. the amount that output changes when exogenous expenditure changes by one unit.
- Compare the formula for the multiplier in (ii) with the case when taxes are exogenous. Show that making taxes proportional to income (i.e. endogenous) reduces the size of the multiplier.
- Explain how reducing the size of the multiplier (or increasing the tax rate t) helps to stabilise the economy.
- Suppose that c=0.8andt=0.25, calculate the multiplier.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started