Find (a) the reduced form. (b) the numerical value of , and (c) the effect on the multiplier if a proportional income tax (t) is incorporated into the model. = + , = + , = + , = − where = = 30, = 85, = 0.75, = 0.2, and = 20.
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In a closed economy with no government, the equilibrium level of income is £22 billion, ... means that we ignore the effects of exports and imports in the circular flow model. ... If the multiplier is 3 then the marginal propensity to save must be 1/3 and the ... propensity to save (MPS) = 0.3 and the marginal rate of tax (MRT) = 0.2.
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