Suppose, C=50+0.8Y I=70 G=200 TR=100 t=0.2... a) calculate the multiplier and the level of...

Question

Suppose, C=50+0.8Y I=70 G=200 TR=100 t=0.2... a) calculate the multiplier and the level of equilibrium income, b) calculating the budget surplus (SP), c) Assume that t rises to 0.25. What's the new equilibrium income and the new multiplier? and d)Calculate the variation of the budget surplus, would the variation of the surplus be higher or lower if c = 0.9 instead of 0.8.

Robert · Accepted Answer

Answer 
Suppose, C=50+0.8Y I=70 G=200 TR=100 t=0.2
a) Calculate the multiplier and the level of equilibrium income 
          C=50+0.8Y 
        Multiplier = 1 / (1- MPC) (1-t) 
                        = 1 / (1- .8) (1 -.2) 
                        = 6.25 
 Equilibrium Income = C + I +G  
         Y = 50 + .8 (Y + TR –T) + 70 + 200 
        Y = 50 + .8 (Y + 100 - .2Y) + 70 +200 
        Y = 400 +.64Y 
         Y = 400 / .36 
                  = 1,111.11
b) Calculating the budget surplus  
                  Tax   = 1,111.11 * .20 
                           = 222.

Suppose, C=50+0.8Y I=70 G=200 TR=100 t=0.2... a) calculate the multiplier and the level of equilibrium income, b) calculating the budget surplus (SP), c) Assume that t rises to 0.25. What's the new...

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