Question

Calculate the open economy multiplier with proportional taxes, T = tY , instead of lump-sum taxes as assumed in the text.

Answer 1

Answer:

In the case of proportional tax, the equilibrium income would be

Y = C + c (1 - t) Y + I + G + X - M – mY

=> Y - c (1 - t) Y + mY = C + I +G + X – M

=> Y [1 - c (1 - t) +m] = C + I + G + X – M

Y = ( C + I + G + X - M)/(1 - c(1 - t) + m)

Autonomous expenditure (A) = C + I + G + X M.Therefore, open economy multiplier with proportional taxes ΔY/ΔA = 1/(1 - c(1 - t) + m)

Explanation:

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