# Now suppose that the people in this economy create a government that raises an income tax

November 24, 2016

Now suppose that the people in this economy create a government that raises an income tax and purchases goods and services. Expenditure,in the economy with government is X=C+I+G The government budget deficit in a Keynesian equilibrium is D=Gā tYk where G is equal to government purchases of goods and services and t is a number between 0 and 1 that represents the income tax rate.The consumption function is given by the expression C=100+0.9(1ā t)Y Assume that investment expenditure remains at I=20 and suppose that the tax rate is set at t=1/9
(a) How big must G be to restore full employment?
(b) How big is the budget deficit,at full employment?
(c) How big is consumption expenditure before and after the government increases G to restore full employment?
(d) Can you find a value of t and a value of G such that the economy is at full employment and the government budget is balanced?
(e) How big is consumption expenditure before and after the government increases G to restore full employment?

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