Question

We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium income? Does the government have a balanced budget?

Answer 1

Answer:

(a) C = 70 + 0.70YD

I = 90

G = 100

T = 0.10Y

Y = C + I +G

Y = 70 + 0.70YD + 90 + 100

Y = 70 + 0.70YD + 190

Y = 70 + 0.70(Y - T) + 190

Y = 70 + 0.70Y - 0.70T + 190

Y = 70 + 0.70Y - 0.70 × 0.10Y + 190

Y = 70 + 0.70Y - 0.07Y + 190

Y = 70 + 0.63Y + 190

Y = 260 + 0.63Y Y - 0.63Y = 260 0.37Y = 260

Y = 260/0.37

Y = 702.7

(b) T = 0.10Y = 0.10 x 702.7  =70.27 Government expenditure = 100 Tax revenue = 70.27 As, G > T, Government has a deficit budget, not a balanced budget.

Explanation:

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