CameraIcon
CameraIcon
SearchIcon
MyQuestionIcon
MyQuestionIcon
1
You visited us 1 times! Enjoying our articles? Unlock Full Access!
Question

Consider an economy described by the following function: C = 20 + 0.80Y, I = 30, G = 50, TR = 100.

(i) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.

(ii) If government expenditure increases by 30, what is the impact on equilibrium income?

(iii) If a lump sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?

Open in App
Solution

I = 30

ΔG = 30

G = 50

TR = 100

c = 0.80

C = 20 + 0.80Y

(i) Equilibrium level of income

Y=11c[¯C+cTR+I+G]

=110.80[20+0.80×100+30+50]

=10.20[180]

=18020×100

=900

Expenditure mulitplier

11c=110.80

=10.20

=10020=5

(ii) Increase in government expenditure =

11c[¯C+cT+I+G+ΔG]

=110.80[20+0.80×100+30+50+30]

=10.20[210]=21020×100=1050

(iii) Tax multiplier =c1c

ΔYΔT=c1c

ΔY=c1c×ΔT

=0.8010.80×30

=8020×30

=120

New equilibrium level of income = Y+ΔY

= 900+(120)

=780


flag
Suggest Corrections
thumbs-up
6
similar_icon
Similar questions
View More
Join BYJU'S Learning Program
similar_icon
Related Videos
thumbnail
lock
Le Chateliers Principle
CHEMISTRY
Watch in App
Join BYJU'S Learning Program
CrossIcon