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Question

Suppose marginal propensity to consume is 0.75 and there is a 20% proportional income tax. Find the change in equilibrium income for the following:

(i) Government purchases increase by 20

(ii) Transfers decrease by 20


Solution

(i) ΔY=11c(1t)×ΔG

=110.75(10.2)×20

=110.75×0.8×20

=2010.60

=200.4

= 50

(ii) ΔY=c1cΔT

=0.7510.75×20

=0.750.25×20=60


Economics

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