Answer to Question #212150 in Macroeconomics for DARRYL

Question

The following equations describe an economy (think of C, I, G, etc as being measured in billions and i as a percentage; a 5 percent interest rate implies i = 5)

           

C = 0.8 (1 – t) Y

           t = 0.25

           I = 900 – 50i

           G = 800

           L = 0.25Y – 62.5.i

           M / P = 500

How does the increase in tax rate  affect the equilibrium level of income?

Answer 1

With an increase in taxes, consumption decreases, contributing to a income or Production decrease in production. The decrease in income minimizes the demand for money. As money supply becomes fixed, interest rates must fall to drive the rates of interest fall in terms of driving and maintaining equilibrium.