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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.
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.
