Question

11. Suppose that, instead of a fixed level of taxes, we had an income tax so that T = t1Y where t1 was the income tax rate. Following the procedure of S ection 5 .4, derive an expression for equilibrium income Y analogous to equation (5.14) for this case in which the level of tax collections depends on income. What is the expression equivalent to the autonomous expenditure multiplier [1>(1 - b)] for this case of an income tax?

Answer 1

The autonomous expenditure multiplier formula in this case is:

$m = \frac{1}{1 - c\times(1 - t1)}$

where c is marginal propensity to consume.