Think about a closed economy with two types of households: the wealthy and the poor. The poor only make money from their jobs, while the rich make up the rest of the country's income. Let's say that the incomes of the rich and the poor are YR and YP, respectively, so that Y = YR + YP. Let's say that the poor spend most of what they earn, while the rich save most of what they earn. Now, remember that T, which stands for taxes, means "net of transfers." In other words, T stands for "taxes" and "transfer payments." Let's say the government gives more money to low-income households by raising taxes on high-income households to pay for it. How does this policy affect short-term equilibrium output? Use the Keynesian-Cross diagram to talk about and explain intuition.
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Think about a closed economy with two types of households- the wealthy.docx
1. Think about a closed economy with two types of households: the wealthy and the poor. The poor
only make money from their jobs, while the rich make up the rest of the country's income. Let's
say that the incomes of the rich and the poor are YR and YP, respectively, so that Y = YR + YP.
Let's say that the poor spend most of what they earn, while the rich save most of what they earn.
Now, remember that T, which stands for taxes, means "net of transfers." In other words, T stands
for "taxes" and "transfer payments." Let's say the government gives more money to low-income
households by raising taxes on high-income households to pay for it. How does this policy affect
short-term equilibrium output? Use the Keynesian-Cross diagram to talk about and explain
intuition.
