Question

35. Death and Taxes. The basic Keynesian Cross model from 11-1 in the textbook assumes taxes are exogenous and independent of income, but that is not realistic so let's modify the model. i. Here are two options for modeling taxes as a function of income: a) T(Y) = 2 + 0.2Y or b) T(Y) = 2-0.2Y Which choice is more realistic? Briefly explain your choice to yourself. Suppose I = 6, C = 10 +0.5(Y-T) and G is unknown. Set up the Keynesian Cross equilibrium condition and solve for Y as a function of G. ii. If G = 4 then Y = _ iii. What would we expect the G multiplier to be based on the simple G multiplier formula (from the slides)? G mult. = (1/1-MPC) = iv. What is the actual G multiplier in this model with endogenous taxes? v. (short response) Is it bigger or smaller than expected? Briefly explain why.

Answer 1

Becasde texes are ma scaliahc (iT) 2t031 elced uthibume ith pume) T1oto31-T)+ 6+G letesy-2-0.21) + 6+G 6405(081- 2) +G 16t04-144 86119 G-4 th 31. 67 P o.6 t NPC0.5 (Bee caneaphen th. Gmet 2 1Atal mulhblrer hth midl we hee y 15t G 0.6 G mulhpiee 1G malhplie - 1.67