Now we lOok at the role taxes play in Ose.we ha economy of the type in Sections 10-4 and 10-5, described by the following functions: C = 50 + .8YD ī= 70 G = 200 TR 100 1-0-0-20. t = .20 a. Calculate the equilibrium level of income and the multiplier in this model. b. Calculate also the budget surplus, BS. c. Suppose that t increases to .25. What is the new equilibrium income? The new multiplier? d! Calculate the change in the budget surplus. Would you expect the change in the surplus to be more or less if c = .9 rather than .8?
Now we lOok at the role taxes play in Ose.we ha economy of the type in Sections 10-4 and 10-5, described by the following functions: C = 50 + .8YD ī= 70 G = 200 TR 100 1-0-0-20. t = .20 a. Calculate the equilibrium level of income and the multiplier in this model. b. Calculate also the budget surplus, BS. c. Suppose that t increases to .25. What is the new equilibrium income? The new multiplier? d! Calculate the change in the budget surplus. Would you expect the change in the surplus to be more or less if c = .9 rather than .8?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
Transcribed Image Text:a. Is the equilibrium level of income higher or lower than it was in problem 1(a)? Calculate
the new equilibrium level, Y', to verify this.
b. Now suppose investment increases to I = 100, just as, in problem 1(d). What is the new
equilibrium income?
Does this change in investment spending have more or less of an effect on Y than it did
in problem 1? Why?
Draw a diagram indicating the change in equilibrium income in this case.
с.
d.
3. Now we look at the role taxes play in determining equilibrium income. Suppose we have an
economy of the type in Sections 10-4 and 10-5, described by the following functions:
C = 50 +.8YD
I = 70
G = 200
TR = 100
1-0-0-20.
t = .20
a. Calculate the equilibrium level of income and the multiplier in this model.
b. Calculate also the budget surplus, BS.
c. Suppose that t increases to .25. What is the new equilibrium income? The new multiplier?
d. Calculate the change in the budget surplus. Would you expect the change in the surplus
to be more or less if c = .9 rather than .8?
e. Can you explain why the multiplier is 1 when t = 1?
4. Suppose the economy is operating at equilibrium, with Y, = 1,000. If the government under-
takes a fiscal change whereby the tax rate, t, increases by .05 and government spending in-
Or0ncr by 50 will the budget surplus go up or down? Why?
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