Macroeconomics 12th Edition by Rudiger Dornbusch ,Stanley Fischer,Richard Startz

Exercise 7

Now we look at the role taxes play in determining equilibrium income. Suppose we have an economy of the type in Sections 10-4 and 10-5, described by the following functions:

a. Calculate the equilibrium level of income and the multiplier in this model.
b. Calculate also the budget surplus, BS.
c. Suppose that t increases to.25. What is the new equilibrium income The new multiplier
d. Calculate the change in the budget surplus. Would you expect the change in the surplus to be more or less if c =.9 rather than.8
e. Can you explain why the multiplier is 1 when t = 1