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3-52E2-4F08-8D08-F744434B1874.jpeg 3 17 - 18% + taxes. Taxes that do not change when GDP changes are cally Farber we had med chat all terins except AC/AGDP were zero. Ler is look more closely at this -taxes Understanding the difference between fixed and variable taxes is important term. It is useful go a in several to note that for understanding how to model changes in taxes on the income-expenditure diagram and his poy SC/AGDP - (AC/ADD (ADIAGDP) standing how income taxes affect the value of the multiplier. The first term ora turn on the right-hand side of the equal sign is the marginal propensity to consume With We have seen that the multiplier process arises because any autonomous increase in spent only fixed taxes means higher income for those who supply the newly demanded goods. These higher incomes way fund rises, the second term will equal 1.0. If there are variable tavr, the second terin greater than ray aralequal toless than) 1.0 and the slope of the expenditure schedule is less than the marginal head to more consum amption spending, and so on, and so on. This process continues to take place, Ing propensity to co (9) it is important to remember that each round of spending produces an increase in income before laws Modeling the iding the impact of a change in taxes will depend upon whether the change is in the fixed or With variable taxes some of the increase in before-tas income goes to pay taxes, and after-tax incums variable compu pur suitponent 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 on, 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 ture schedule. A change in variable taxes would be a change in the tax rate and leads to ome taxes (and transfer payments) that vary with income, a change in the change 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 on schedule would would become (flatter/steeper) (10 ) (7) income, from any inc ding, will be (smaller/larger) than before. The impact Let us be to is be more specific about how we can model a change in the fixed component of taxes. of inc on the mulplier is another important reason why our earlier formula for the mulu- (Changes in ur pher, 1/(1 - MPC), was oversimplified. Clumps in transfer payments will have similar but opposite effects since transfer payments can be viewed as neg wod is negative taxes.) We saw earlier that a SI 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 sc schedule by $1. Consider a permanent $1 reduction in the fixed component of income sumed that taxes did not vary with income, that is, earlier models considered only fixed taxes. A SI taxes, What is to. What is the magnitude of the initial shift of the ex spenditure schedule that initiates the multi- change in GDP mear come and led to an increase in plier process? spending given by the MPC Since in th poor process? It is the initial impact on consumption spending that determines the magnitude of the ption spending was the only type of spend shift in the e in the expenditure schedule. Our discussion of the consumption function showed that a $1 ing that changed when GDP changed, the slope of the expenditure schedule was equal to the increase in d (8 Miras in disposable income will increase consumption spending by less than SI because the Now when we consider the impact of variable taxes, we see that a S] increase is ( is (les than/equal to/greater than) 1.0. The result is that a $1 change in the fixed compo- (11) in GDP leads to a(m) (smaller/equallarger) increase in disposable income and a() bent uf tries of mars shifts the expenditure schedule by (less/more) than a $1 change in government purchases. on spending as compared with the case of fixed taxes. The As a result result is a (flattertarexper) expenditure schedule. ready, the minddiplier associated with changes in income taxes will be (larger/smaller) than the As we saw cartier, the multiplier can be derived from the slope of the expenditure schedule. The Wepher asociated with changes in government purchases. slope of the expenditure schedule can be written is Slope of the Expenditure Schedulea Thes maly so st w schulde. Fa ACAGUP . ADSGDP . AGAGDP + AVAGDP- ALMAGDP su bloomer bos induced spending offerto the slope of the espendin in GDP, then stwoCUP will be parmer then very and des slope of char depending