Question

Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?

Answer 1

In contrast, if a country imports more than it exports, there is relatively less demand for its currency, so prices should decline. In the case of currency, it depreciates or loses value.The supply of a currency is determined by the domestic demand for imports from abroad.  The more it imports the greater the supply of pounds onto the foreign exchange market. A large proportion of short-term trade in currencies is by dealers who work for financial institutions.

Answer 2

Answer: The answer is as follows:

Explanation:

Given that,

C = 20 + 0.80Y,

I = 30,

G = 50,

TR = 100

Marginal propensity to consume (c) = 0.8

Autonomous consumption (C bar) = 20

(a) Equilibrium level of income = $\frac{1}{1 - c} [C bar + cTR + I + G]$

                                                  = $\frac{1}{1 - 0.8} [20 + (0.8\times100) + 30 + 50]$

                                                  = 900

Autonomous Expenditure multiplier = $\frac{1}{1 - c}$

= $\frac{1}{1 - 0.8}$

= 5

(b) If government expenditure increases by 30 then,

New Equilibrium level of income = $\frac{1}{1 - c} [C bar + cTR + I + G + delta(G)]$

                                                        = $\frac{1}{1 - 0.8} [20 + (0.8\times100) + 30 + 50 + 30]$

                                                        = 1050

Change in Equilibrium income = 1050 - 900

                                                     = 150

(c)  If a lump-sum tax of 30 is added to pay for the increase in government purchases then,

Tax multiplier = $\frac{change\ in\ Y}{change\ in\ T} = \frac{-c}{1 - c}$

                        = $\frac{-0.8}{0.2}$

                        = -4

$\frac{change\ in\ Y}{Change\ in\ T} = -4$

Change in Y = Change in T × -4

                     = 30 × -4

                     = -120

Therefore,

Change in equilibrium income = 900 - 120

                                                   = 780