Question

Suppose the government raises its revenue by a net tax of 40 percent on income, t = 0.4. The marginal propensity to consume out of disposable income is 0.9 and the marginal propensity to import is 0.2.
Note: Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places.

a) What is the slope of the AE function? What is the size of the multiplier?

b) Autonomous expenditure by the household and business sectors (C + I) is 300, government expenditure is 400, exports are 50 and imports are 70. What is the autonomous expenditure and equilibrium output? What is the government's budget balance?

c) The government increases its expenditures by 60 to provide additional funding for national defense. What is the effect on equilibrium income and output? What is the effect on the net tax revenue?

d) What is the government's new budget balance?

Answer 1