Answer to Question #181549 in Macroeconomics for Kate Lynch

Question

assume the following economy

autonomous consumption =£3m

marginal propensity to consume= 0.8

business investment = 52

government spending =£127m

income tax rate = 40%

A. Find equilibrium size of income Y.

B. Identify whether the government runs a budget deficit or a budget surplus

Answer 1

A. 

Equilibrium income 

$Y = C + I + G$

$Y = Ca + cYd + I + G$   

where $Yd = Y - tY$

$Y = £3m + 0.8(Y - 0.4Y) + £52m + £127m$

$Y- 0.48Y = £182m$  

$0.52Y = £182m$  

$Y =\frac{ £182m}{0.52}$  

$Y = £350m$  

B. Budget surplus $= tY - G$  

  $= 0.4(£350m) - £127m$

  $= £140m - £127m$

  $= £13m.$