Consider the following model
i) C = 1500 + mpc (Y – tY)
ii) I = 800
iii) G = 500
iv) X – M = 500 – mpi (Y)
t = the (flat) tax rate
mpc = the marginal propensity to consume
mpi = the marginal propensity to import
suppose mpc = .80, t = .25, mpi = .2
Given that t=.25, we know that .25 of every dollar increase in gross income is a leakage due to taxes. Since the increase in income is $100, we know the leakage due to taxes is:
Now what is the federal funds rate implied by the modified Taylor Rule above?
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