Lecture 2 Exercise 3

The steady state value of output will remain constant when the personal income tax rate changes because the level of government expenditure will change in the same ratio.

For example, suppose government expenditure is 100m and the tax rate is 20%, giving an output of 5. If the government decides to increase the tax rate to 25%, then government expenditure is expected to increase to 125m given the steady state condition. Output remains at 5.