In this chapter we have assumed that the fiscal policy variables, G and T , are independent of the level of
income. In the real world, however, this is not the case. Taxes typically depend on the level of income and so tend to be higher when income is higher. In this problem, we examine how this automatic response of taxes can help reduce the impact of changes in autonomous spending on output.
Consider the following behavioral equations:
C = c0+c1YD
T = t0+t1Y