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Question

Suppose marginal propensity to consume is 0.75 and there is a 20 per cent proportional income tax. Find the change in equilibrium income for the following (a) Government purchases increase by 20 (b) Transfers decrease by 20.


Solution

In case of proportional taxes

(a)

MPC = 0.75 and ΔG = 20

= 50

(b) Transfer decreases by 20

= 60


Economics
Introductory Macroeconomics
Standard XII

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