Answer to Question #218537 in Macroeconomics for lex

Question #218537

Suppose the government decides to reduce transfer payments but increase government

purchase of goods and services by an equal amount i.e. ∆G=-∆TR (5 points)

a. Would equilibrium income rise or fall as a result of this change? Show using the

following data c=0.8, t=0.25, Y 0 =600, ∆G=10=-∆TR. (2)

b. Find the change in equilibrium change in income ∆Y 0 (2)

c. What is the change in budget surplus? Why has it changed? (1)


1
Expert's answer
2021-07-19T14:26:36-0400

a

Tm=11c(1t)Tm=110.8(10.25)Tm=2.5T_m=\frac{1}{1-c(1-t)}\\ T_m=\frac{1}{1-0.8(1-0.25)}\\ T_m=2.5

We also know,

Tm=ΔYΔTR2.5=ΔY10ΔY=2.510=25T_m=\frac{\Delta Y}{\Delta TR}\\ 2.5=\frac{\Delta Y}{10}\\ \Delta Y= 2.5*10=25

Thus, change in equilibrium income due to change in taxes = 25

The expenditure multiplier is given as,

M=11cM=110.8M=5M=\frac{1}{1-c}\\ M=\frac{1}{1-0.8}\\ M=5

We also know,

Tm=ΔYΔTR5=ΔY10ΔY=510=50T_m=\frac{\Delta Y}{\Delta TR}\\ 5=\frac{\Delta Y}{10}\\ \Delta Y= 5*10=50

Thus, change in equilibrium income due to change in Expenditure = 50

Thus, equilibrium income rises as the expenditure multiplier is stronger than the tax multiplier.

b.

So, Change in Total Income = 50 - 25 = 25

c.

ΔBS=(1c)(1t)1c(1t)ΔGΔBS=(10.8)(10.75)10.8(10.75)10ΔBS=1.25\Delta BS= \frac{(1-c)(1-t)}{1-c(1-t)} \Delta G\\ \Delta BS= \frac{(1-0.8)(1-0.75)}{1-0.8(1-0.75)} *10\\ \Delta BS=-1.25\\

Thus, Budget surplus changes because the expenditure multiplier is stronger than the tax multiplier


Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!

Comments

No comments. Be the first!

Leave a comment