Income taxes
Suppose that the government decides to impose an income tax as opposed to "lump sum" tax. We can now model the conomy as follows
C=100+.9YD AE= C+I+G I=500 G=500
Where YD= Y-T= Y-.2Y and .2 represents a 20% income tax. Solve for equilibrium income in this case. Graph this economy.
B) What is the size of governemnt surplus or deficit in this case?
c) What is the fiscal multiplier in this case?
D) Solve for the income tax multiplier algebracially in the general case. is this larger or smaller than the lump sum tax multiplier?