Return to the simple Keynesian model in Section 4. Suppose that: G is 700; I is 310;
Question:
C = 250 + 0.8YD Net
Taxes (T) are given by the tax function
T = -50 + 0.25Y
Calculate equilibrium income. Now assume that I falls 80 units to 230. Calculate the new level of equilibrium income and compute the value of the deficit (G-T) at that level of income. Suppose that the government raises lump-sum taxes (increases t0) by the amount of the deficit in order to balance the budget. What will be the new level of equilibrium income? Will the budget be balanced? Explain.
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The structural deficit is that portion of the deficit tha...View the full answer
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