We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y.
- Find the equilibrium income.
- What are tax revenues at equilibrium income?
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- c = 70+ 0.70 YD
G = 100
T = 0.10Y
Y= C + I + G
= 70 + 0.70 Y + 90 + 100
= 70 + 0.70 YD + 190
= 70 + 0.70 (Y - T) + 190
= 70 + 0.70Y – 0.70 × 0.10 Y + 190
= 70 + 0.70 – 0.07Y + 190
= 70 + 0.63Y + 190
= 260 + 063Y
Y – 0.634 = 260
0.37Y = 260
Y = 260/0.37
= 702.7
- T = 0.10Y
= 70.27
Government expenditure = 100
Tax revenue= 70.27
Government has a deficit budget, not a balanced budget because government expenditure exceeds the tax revenue. (G > T)
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