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?


Given is

C = 70 + 0.70 YD


I = 90


G = 100


T = 0.10Y


Y = C + I +G


(a) Find the equilibrium income


Y = 70 + 0.70YD + 90 + 100


Y = 0.70YD + 260


Y = 260 + 0.70 (Y - T)


Y = 260 + 0.70Y - 0.70T


Y = 260 + 0.70Y - 0.70 × 0.10 Y


Y = 260 + 0.63Y


Y - 0.63Y = 260


Y = 260/0.37


Y = 702.7


(b) What are tax revenues at equilibrium income? Does the government have a balanced budget?


T = 0.10Y


= 0.10 X 702.7


= 70.27


This shows that Govt Expenditure is more than tax revenue, so it is not a balanced budget but a deficit budget


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