We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find the equilibrium income. (b) What are tax revenues at equilibrium income? Does the government have a balanced budget?
(a) C = 70 + 0.70 YD
I = 90
G = 100
T = 0.10 Y
Y = C + I + G
Y = 70 + 0.70 Y + 90 + 100
Y = 70 + 0.70 YD + 190
Y = 70 + 0.70 (Y - T) + 190
Y = 70 + 0.70 Y - 0.70 × 0.10 Y + 190
Y = 70 + 0.70 Y - 0.07Y + 190
Y = 70 + 0.63 Y + 190
Y = 260 + 0.63 Y
Y - 0.634 = 260
0.37 Y = 260
Y =
Y = 702.7
(b) T = 0.10Y
= 0.10 × 702.7
= 70.27
Government expenditure = 100
Tax revenue = 70.27
As, G > T, Government has a deficit budget, not a balanced budget.
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Rs (crore)
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