Answer to Question #95256 in Macroeconomics for komal

Question

13. Suppose that within the open-economy version of the Keynesian model in Section 5. 7, we now include taxes. Disposable income (YD = Y - T) therefore replaces GDP ( Y) in the consumption function (5.24). Compute the expression for equilibrium income for this version of the open-economy model. Compute an expression for the tax multiplier (Y>T) in the model.

Answer 1

The equilibrium income for this version of the open-economy model is:

Y = C0 + c(Y - T) + I + G + NX, where C0 is autonomous consumption, c is marginal propensity to consume, T is taxes, I is investment, G is government purchases, NX is net exports.

The expression for the tax multiplier is:

t = T/Y.