Suppose that tax revenue depends on income so thatT=t0+t1Ywhere 0< t1< 1. Part I:

a. For given values oft0,t1andGwhat happens "automatically" to the governmentbudget deficit when the economy goes into a recession?

b. Discuss what happens to the size of the multiplier effect (e.g. how much equilibrium Y changes in response to a change in I) ast1increases from 0 to a positive number such as 0.2. In your discussion use a flow diagram.

c. Why does havingt1 >0, "automatically stabilize" i.e. make the economy more stablethan ift1=0 ?