Multiplier question..

[Spiti]

[Homer Simpson]

i think Y should increase

[Spiti]

I thought when govt increases taxes, disposable income decreases which should reduce consumption and consequently Y.
But in the question I'm confused if when govt raises taxes, does it accordingly raise G to keep G=tY? In that case Y would increases.

[Homer Simpson]

it is not said explicitly but i reckon this is a case of balanced budget multiplier. Govt is increasing G - this would mean more AD and Y. Now this higher Y also has an effect on tax collections along with the dampening effect of higher tax rates. Usually overall Y will rise.

was wondering though! if i have both the IS LM market going on, would balanced budget multiplier be different from 1? any thoughts on this?

[Spiti]

I think, even in a closed economy, balanced budget multiplier is not always equal to one. In IS LM equilibrium, denominator would have an additional term, marginal propensity to invest. So would be less than one.
Also, multiplier value is determined by our assumption of tax revenue, whether it is autonomously determined or as a function of income.

[Akshay Jain]

Y=a+bY(1-t)+I+ tY......(tY=G)
Y=a+bY-btY+I+tY
Y(1-b+bt-t)=a+I
Y=(a+I)/(1-b+bt-t)
dY/dt=-((a+I)/(1-b+bt-t)^2)*(b-1)
which is positive...so income increases