Final answer:
In this model where the government spending is set at G=tY, G is endogenous as it depends on tax rate and national income. The expenditure multiplier is smaller due to the offsetting effect of higher taxes on spending. When the tax rate increases, the net effect on national income depends on various factors and cannot be determined without further analysis.
Step-by-step explanation:
In an economy where the government's spending is confined to the amount raised through taxation, meaning G=tY, the government spending (G) is considered an endogenous variable because it is determined within the system by the level of national income (Y) and the tax rate (t). On the other hand, an exogenous variable is one that is determined outside the model and does not change with the economy's level of income.
The expenditure multiplier when government spending is endogenous is likely smaller than when spending is exogenous. This is because, with endogenous spending, an increase in income leads to higher taxes and therefore higher government spending, partially offsetting the initial increase in spending. Whether this is good or bad depends on the context; a smaller multiplier might be less effective at stimulating economic activity, but it could help prevent overheating and maintain budgetary discipline.
When the tax rate (t) increases, disposable income decreases, which would usually lead to a decrease in consumer spending and thus national income (Y) would decrease. However, the increase in taxes also means an increase in government spending, which would have an expansionary effect. Without solving the model explicitly, we cannot ascertain the net effect on national income, as it depends on the relative sizes of the marginal propensities to consume and the tax rate.