Exercise 3 - Steady state

What do you think will happen to the steady state value(s) of output when θ changes? Why does this happen?

Y = G / θ

where:
Y = National Income in nominal terms;
G = Pure Government Expenditures in nominal terms; and
θ = Personal Income Tax Rate

When θ goes up, Y goes down. If the countries’ economy has overheated this could be a way of lowering that heat. The greater the tax rates, the less that will be spent.
Government could lower θ to reactivate economy, but only to a certain extent. Government cannot lower θ by too much because the quality and quantity of the goods and services that are paid for by those taxes would go down as well.