Class 12 Macro Economics - Chapter Government Budget and Economy NCERT Solutions | Consider an economy described by the fol
Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100 (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model. (b) If government expenditure increases by 30, what is the impact on equilibrium income? (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?
(a) C = 20 + 0.80 Y
I = 30
c = 0.80
G = 50
T = 100
Equilibrium level of income
Y =
=
Expenditure multiplier
(b) Increase in government expenditure
∆G = 30
New equilibrium expenditure
Equilibrium level of income increase by 150 (1050 - 900)
(c) Tax multiplier
So,
=
=
= -120
New equilibrium level of income = Y+ ∆Y
= 900 + (-120)
= Rs 780
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