Discuss the effect of an increase in the tax rate
Given the following macroeconomic model:
Y = C + I0 + G0 Equilibrium Income (Y)
C = a + b(Y-T) Consumption with Taxes (T), where: a > 0, 0 < b < 1
T = d + tY Tax function, where: d > 0, 0 < t < 1
Note: I0 = exogenous income, G0 = exogenous govt. spending.
Question: Discuss the effect (increase or decrease) of an increase in the tax rate, t, on the equilibrium income Y* using the effect of increasing t on the equilibrium solution
