Question

Recall that net taxes are not lump sum, but are typically a percentage of income. Suppose the income tax rate were increased from 20% (T = 0.20Y) to 30% (T = 0.30Y). If the MPC were unaffected,

      a. Explain what effect this tax rate increase would have on the slope of the PE curve.

2. Briefly explain how this tax rate increase would affect the simple multiplier.
3. What effect would this tax rate increase have on the slopes (or shapes) of the IS and LM curves?  
4. Use your answer to part c. to illustrate (with a graph), state, and explain what effect this tax rate increase would have on the power of monetary policy to change GDP.

Answer 1