Advertisements
Advertisements
Question
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?
Advertisements
Solution
(a) C = 20 + 0.80 Y `[barC=20]`
I = 30
c = 0.80
G = 50
T = 100
Equilibrium level of income
`Y=1/(1-c)[barC+cT+I+G]`
`=1/(1-0.80)[20+0.80xx100+30+50]`
`=1/0.20xx180=180/20xx100=900`
Expenditure multiplier `=1/(1-c)`
`=1/(1-0.80)=1/0.20=100/220=5`
(b) Increase in government expenditure
ΔG = 30
New equilibrium expenditure
`=1/(1-c)[barC+cT+I+G+DeltaG]`
`=1/(1-0.80)[20+0.80xx100+30+50+30]`
`=1/(1-0.80)[20+80+30+50+30]`
`=1/0.20xx210`
`=210/20xx100=1050`
Equilibrium level of income increases by 150 (1050 − 900)
(c) Tax multiplier `=(-c)/(1-c)`
`(DeltaY)/(DeltaT)=(-c)/(1-c)`
So, `DeltaY=(-c)/(1-c)xxDeltaT`
`=(-0.80)/(1-0.80)xx30`
`=(-0.80)/0.20xx30=-120`
New Equilibrium level of income = Y + ΔY
= 900 + (−120)
= Rs 780
APPEARS IN
RELATED QUESTIONS
Distinguish between revenue deficit and fiscal deficit.
Explain 'Revenue Deficit in a Government budget? What does it indicate?
‘The fiscal deficit gives the borrowing requirement of the government’. Elucidate.
Give the relationship between the revenue deficit and the fiscal deficit.
We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium Income? Does the government have a balanced budget?
What do you understand by G.S.T?
Answer the following question.
In the given figure, what does the gap 'KT' represent? State any two fiscal measures to correct the situation.
Classify the following statement into positive economic or normative economic, with suitable reason:
Government should try to control the rising fiscal deficit.
Fiscal deficit = ______.
| S. No. | Content | Rs (in crores) |
| 1. | Revenue Expenditure | 100 |
| 2. | Capital Receipts | 40 |
| 3. | Net Borrowings | 38 |
| 4. | Net Interest Payments | 27 |
| 5. | Tax Revenue | 50 |
| 6. | Non-tax Revenue | 15 |
Which of the following is MOST LIKELY to be the main contributor to the fiscal deficit in this case?
What is relation between government deficit and government debt?
______ are the transactions between the residents of two countries that take place due to consideration of profit.
______ are those transactions that are undertaken to cover deficit or surplus in autonomous transactions.
If India exports goods worth ₹20 crores and imports goods worth ₹30 crores, it will have a ______
Which of the following statements is true?
Fiscal Deficit equals:
How good is the system of G.S.T as compared to the old tax system?
