Macroeconomics Answers

Suppose 

MPC = 0.8 

t = 0.25 

Initial Equilibrium level of GDP be Y0 = 600 

∆G = 10 

∆TR = -10 

(a) Find the change in equilibrium level of GDP i.e. ∆Y0.

(b) What is the change in the Budget Surplus i.e. ∆BS? Why has BS changed?

C = 50 + 0.8YD 

I = 70 

G = 200 

TR = 200 (i.e. Transfer Payments) 

t = 0.20 

(a) Calculate the value of multiplier and equilibrium level of GDP. 

(b) Calculate the Budget Surplus. 

(c) Suppose that tax rate increases from 20% to 25%, what is the new equilibrium 

income? What is the new multiplier? Also calculate the change in budget surplus. 

(d) Would you expect the change in the surplus to be more or less if the value of MPC 

had been 0.9 rather than 0.8? 

(e) Can you explain why the value of multiplier is 1 when t = 1.

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