In the above question, calculate the effect on output of a 10 percent increase in transfers, and a 10 percent increase in lump-sum taxes. Compare the effects of the two.
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MPC = 0.80$\bar{\text{C}}=20$
I = 30 G = 50 TR = 100$\Delta\text{TR}=10$
Equilibrium level of income =$\frac{1}{1-\text{c}}[\bar{C}+\text{cTR}+\text{I}+\text{G}+\Delta\text{TR}]$
$\frac{1}{1-0.80}[20+0.80\times100+30+50+0.80\times10]$
$=\frac{188}{0.20}\times100$ = Rs. 940. Increase in lump-sum tax $\Delta\text{T}=10$ Change in Income $=\Delta\text{T}=\frac{-\text{c}}{1-\text{c}}$$=-10\times\frac{0.80}{0.20}$
$=-10\times4$
$=-40$
From the above results, we can conclude that increase of 10 percent in transfers will raise the income by 40%. And, increase of 10% in tax will lead to a fall in the income by 40%.
I = 30 G = 50 TR = 100$\Delta\text{TR}=10$
Equilibrium level of income =$\frac{1}{1-\text{c}}[\bar{C}+\text{cTR}+\text{I}+\text{G}+\Delta\text{TR}]$
$\frac{1}{1-0.80}[20+0.80\times100+30+50+0.80\times10]$
$=\frac{188}{0.20}\times100$ = Rs. 940. Increase in lump-sum tax $\Delta\text{T}=10$ Change in Income $=\Delta\text{T}=\frac{-\text{c}}{1-\text{c}}$$=-10\times\frac{0.80}{0.20}$
$=-10\times4$
$=-40$
From the above results, we can conclude that increase of 10 percent in transfers will raise the income by 40%. And, increase of 10% in tax will lead to a fall in the income by 40%.
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