Answer to Question #95249 in Macroeconomics for komal

Question

6. In the simple Keynesian model, an increase of 1 dollar in tax will cause equilibrium income to decrease by only a fraction (b) of this 1-dollar increase. Explain the process by which this happens.

Answer 1

The process by which this happens is called a multiplier effect. It depends on marginal propensity to consume and marginal tax rate.