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?

Question

Philoid · Accepted Answer

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