In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare the effects of the two.
C = 20 + 0.80 Y (C = 20 & MPC = 0.8)
I = 30
c = 0.80
G = 50
TR = 100
∆TR = 10
(a) Equilibrium level of income = 1/(1-c) [C + cTR + I + G + c∆TR]
= 1/ (1 – 0.8) [20 + (0.8 X 100) + 30 + 50 + (0.8 x 10)]
∆Y = 940 – 900 = 40
Change in income due to change in tax
∆Y = -c/1-c X ∆T = - 40
Therefore increase in 10% in transfer will raise the income by 40% and increase in 10 % in tax will decrease the income by 40%
Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.
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?