Would balanced budget requirement make nations real income

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Reference no: EM13212317

Consider the following model of a closed economy in which household income taxes are proportional to income: Yd = C + I + G C = 200 + 0.80(Y-T) Y=Yd I=600 T= 0.20 Y G = 1000

a. What is "autonomous expenditure" for this economy? Hint: by definition, it will not depend on the value of real aggregate income (Y).

b. What is the short run equilibrium value of real aggregate income (Y) for this economy?

c. All else equal, what is the new short run equilibrium value of income if government purchases (G) are increased by 200 (from 1000 to 1200)?

d. What is the spending multiplier for this economy? Hint: it is NOT equal to 1/(1-0.80).

e. Suppose that the government is required by law to keep its budget balanced, so that government purchases must always equal income tax revenue (G = T = 0.20Y). What is the spending multiplier in that case?

f. Would a balanced budget requirement make a nation's real income more or less vulnerable to negative spending shocks?

Reference no: EM13212317

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