C2. | Consider a closed demand-determined economy with fixed prices and wages. Consumption depends positively on disposable income C(Y) co + G (Y- NT (Y)). The shock: The govemment decides to switch from an income tax to a consumption tax policy leaving the marginal tax rate unchanged. Specifically, in the net tax function NT (Y) = To+ tY + tC(Y), switches from the initial regime with T = 0, to a regime with t = 0. Find the new (after the reform) slope of the IS schedule and compare it with the initial one (before the reform), assuming t = t.

C2. | Consider a closed demand-determined economy with fixed prices and wages. Consumption depends positively on disposable income C(Y) co + G (Y- NT (Y)). The shock: The govemment decides to switch from an income tax to a consumption tax policy leaving the marginal tax rate unchanged. Specifically, in the net tax function NT (Y) = To+ tY + tC(Y), switches from the initial regime with T = 0, to a regime with t = 0. Find the new (after the reform) slope of the IS schedule and compare it with the initial one (before the reform), assuming t = t.

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter11: Managing Aggregate Demand: Fiscal Policy

Section: Chapter Questions

Problem 1TY

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