You can use the AE model to show that an increase in government purchases can increase output but in many cases it is hard to find useful things for the government to quickly spend money on. Many people in Boston say “the T is so slow, why not spend it on building or replacing the subway lines?" but new subways lines can take years to plan. A fast alternative is to cut net taxes by sending people transfer payments. Consider a standard AE model with this consumption function, C=4+0.5Y-bT and unknown and unimportant values for planned investment and planned government purchases. What is the "T multiplier," which is defined as the change in equilibrium income per $1 increase in taxes? -b -2b +b +2b O O O O

You can use the AE model to show that an increase in government purchases can increase output but in many cases it is hard to find useful things for the government to quickly spend money on. Many people in Boston say “the T is so slow, why not spend it on building or replacing the subway lines?" but new subways lines can take years to plan. A fast alternative is to cut net taxes by sending people transfer payments. Consider a standard AE model with this consumption function, C=4+0.5Y-bT and unknown and unimportant values for planned investment and planned government purchases. What is the "T multiplier," which is defined as the change in equilibrium income per $1 increase in taxes? -b -2b +b +2b O O O O

ECON MACRO

5th Edition

ISBN:9781337000529

Author:William A. McEachern

Publisher:William A. McEachern

Chapter9: Aggregate Demand

Section: Chapter Questions

Problem 1.1P

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