Question: Problem 4 Automatic stabilizers In this chapter we have assumed that the fiscal policy variables G and T are independent of the level of income.

Problem 4 Automatic stabilizers 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 tends 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 behavioural equations: C=Co+61YD T=b0+b1Y YD=YT co, b0, G, and I are positive constant. Assume that 0

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