Chapter 14 Tutorial 1

Question:

Government decides to change tax system from an income tax to an expenditure (or consumption) tax. Therefore, people will pay tax only on that part of their income which they use for CONSUMPTION. The tax system has been and will remain proportional. There is no change in tax.

a) What is the closed economy multiplier with the new tax system? Is it larger or smaller than the previous multiplier under the income tax system?

b) Analyze the effects of the change on an open economy WITHOUT capital mobility and with a FIXED exchange rate regime.

c) Analyze the effects of the change on an open economy with PERFECT capital mobility and with a FIXED exchange rate regime.

d) Analyze the effects of the change on an open economy with PERFECT capital mobility and with a FLEXIBLE exchange rate regime.

 

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Solution:

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One Comments

  1. Jeremy says:

    Umm, no offence or anything but you do realise that you actually gotten the multiplier at the earlier stage at 13:40 already…