Answer to Question #310388 in Macroeconomics for jes

Question

1. now we look at the role taxes play in determining equilibrium income. Suppose we have an economy described by the following functions:

C = 500 + 0.8YD

I  = 700

G = 300

TR = 100

TA =  400

NX = -100

a. Calculate the equilibrium level of income and the multiplier in this model.

b. Calculate also the budget surplus, BS.

c. Suppose that TA increases to 500. What is the new equilibrium income? 

Answer 1

a. Calculate the equilibrium level of income and the multiplier in this model.

At equilibrium, YD=I+C

YD=700+500+0.8YD

YD-0.8YD=1200

$\cancel{0.2}YD=\frac{1200}{0.2}=6,000$

Equilibrium income=

Income multiplier=0.8

b. Calculate also the budget surplus, BS.

S=YD-C-G-T-Nx=6,000-980-700-300+400=4,420

c. Suppose that TA increases to 500. What is the new equilibrium income? 

New equilibrium=6000-100=5,900