Question

Suppose the BreeZa economy can be described by the following equations and values:

C = 400,     I = 320,       G = 100,       T = 150,      NX = 100

mpc = 0.9,     c = 8 ,     d = 15,     x = 10 ,   t = 0.2

In constructing the model, we assumed that the tax, T , was independent of income. Suppose instead that the taxes for the BreeZa economy has a fixed component and a proportional component and takes the form

T=T+tY

1. Solve for the equation for the IS curve for BreeZa economy. Show at least three lines of derivation.
2. Calculate the government purchases multiplier for BreeZa economy.
3. Calculate the tax multiplier for BreeZa economy.

Answer 1