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Question:

Calculate the open economy multiplier with proportional taxes, T = tY, instead of lump-sum taxes as assumed in the text.

Answer:

In the case of proportional tax, the equilibrium income would be

Y = C + c (1 - t) Y + I + G + X - M - mY
Y - c (1 - t) Y + mY = C + I +G + X - M
Y[1 - c (1 - t) +m] = C + I + G + X – M

Autonomous expenditure (A) = C + I + G + X - M

Therefore, open economy multiplier with proportional taxes


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