<p>Notice that you only  consume out of your <em>disposable</em> income, that is, adding transfers and removing taxes. Thus, from that formula of the multiplier, yes, it should be there, in the $(1-t)$.</p>

<p>As (assuming) $C=cY^D=c(1-t)Y$ and thus, $MPC=\partial C/\partial Y = c (1-t)$, then $Y-Y^D=tY=\text{Taxes}-\text{Transfers}$, with $t$ "condensing" all the information.</p>

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2016-05-19T18:07:48.757Z
2016-05-19T18:07:48.757Z
user_newbie10
<p>Where do transfer payments (unemployment subsidies, etc.) enter in the multiplier formula for the IS curve? </p>

<p>The usual multiplier is of the form $\frac{1}{1-c(1-t)-m}$, where $c$ is the marginal propensity(m.p.) to consume, $m$ is m.p. to import, and $t$ is the tax rate. I've tried to see $t$ instead as net transfers rate, i.e. transfer payments minus taxes. But I'm not sure if it's the right way to think about this...</p>

<p>Any help would be appreciated.</p>

<macroeconomics>
Transfer payments and IS multiplier
An old man in the sea.
# Transfer payments and IS multiplier

(Asked by: username_0 on 2016-05-18)

Where do transfer payments (unemployment subsidies, etc.) enter in the multiplier formula for the IS curve?

The usual multiplier is of the form $\frac{1}{1-c(1-t)-m}$, where $c$ is the marginal propensity(m.p.) to consume, $m$ is m.p. to import, and $t$ is the tax rate. I've tried to see $t$ instead as net transfers rate, i.e. transfer payments minus taxes. But I'm not sure if it's the right way to think about this...

Any help would be appreciated.

**Tags:** macroeconomics


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## 1 answers

### Answer by username_1 on 2016-05-19. Score: 1 | Accepted answer

Notice that you only consume out of your *disposable* income, that is, adding transfers and removing taxes. Thus, from that formula of the multiplier, yes, it should be there, in the $(1-t)$.

As (assuming) $C=cY^D=c(1-t)Y$ and thus, $MPC=\partial C/\partial Y = c (1-t)$, then $Y-Y^D=tY=\text{Taxes}-\text{Transfers}$, with $t$ "condensing" all the information.


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