Assume a model with no foreign sector, an income tax rate of 0.25, a consumption function defined as C = 680 + (0.8)YD and where autonomous investment, government spending and transfers are all equal to 100 and lump sum taxes are 200. What is the level of equilibrium income in this model economy?
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Expert's answer
2017-02-21T13:47:11-0500
t=0.25 C = 680 + (0.8)Yd I=G=T=100 TR=200 Equilibrium level of national income Y=C+I+G Disposable income Yd=(Y-T- t*Y+TR) Therefore, substituting the values of various parameters and variables we have Y = 680 + 0.8*(Y-T-t*Y+TR)+I+G Y=680+0.8*(Y-200- 0.25*Y+100)+100+100 Y-0.8Y+0.2Y=680- 160+80+200 0.4Y=800 Y=2000 Answer: The equilibrium income in in this model economy is equal to 2000
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