Answer :

The open economy multiplier with proportional taxes will 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


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


Autonomous expenditure (A) = C + I + G + X – M .Therefore, open economy multiplier with proportional taxes will be –


Y = A / 1 - c (1 - t) +m


∆Y/∆A = 1 / 1 - c (1 - t) +m


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