Advertisements
Advertisements
Question
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.
Advertisements
Solution
I = 200
G = 150
T = 100
C = 100 + 0.75 Y
So, C (Autonomous consumption) = 100
And, MPC (c) = 0.75
(a) Equilibrium level of income
`Y=1/(1-c)(barC-cT+I+G)`
`=1/(1-0.75)(100-0.75xx100+200+150)`
`=1/0.25xx375`
`=375/0.25xx100="Rs."1500`
(b) Government expenditure multiplier
`(DeltaY)/(DeltaG)=1/(1-c)=1/(1-0.75)=1/0.25`
`=1/25xx100=4`
Tax multiplier `=(DeltaY)/(DeltaT)=(-c)/(1-c)`
`=(-0.75)/(1-0.75)=(-0.75)/0.25=-3`
(c) ΔG = 200
New equilibrium income
`=1/(1-c)[bar C-cT+I+G+DeltaG]`
`=1/(1-0.75)[100-0.75xx100+200+150+200]`
`=1/0.25xx575`
`=(100xx575)/25="Rs." 2300`
Therefore, change in equilibrium income = 2300 − 1500 = Rs 800
APPEARS IN
RELATED QUESTIONS
Distinguish between revenue deficit and fiscal deficit.
Consider an economy described by the following functions:- C = 20 + 0.80Y, I = 30, G = 50, TR = 100, 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.
Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.
Explain the relation between government deficit and government debt.
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.
| 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 the formula for revenue deficit?
Assertion (A): Fiscal deficit is measured in terms of borrowings.
Reason (R): External borrowings increases the Fiscal deficit.
______ in the budget is an important measure of deficit.
If India exports goods worth ₹20 crores and imports goods worth ₹30 crores, it will have a ______
Which of the following points are related to the current alarm?
Identify the correctly matched pair of the items in Column A to those in Column B:
| Column A | Column B | ||
| 1 | Fiscal Deficit | (a) | Other than interest payments |
| 2 | Primary Deficit | (b) | Borrowings less interest payments |
| 3 | Revenue Deficit | (c) | Borrowings |
| 4 | Tax Deficit | (d) | Borrowings in government budget |
Fiscal Deficit equals:
How good is the system of G.S.T as compared to the old tax system?
A Budget Deficit refers to a situation where:
A Revenue Deficit occurs when:
Which of the following formulas correctly defines the Fiscal Deficit?
The Primary Deficit shows the borrowing requirement of the government:
Which of the following formulas correctly defines Revenue Receipts?
