Question: Return to the simple Keynesian model in Section 18.4 . Suppose that: G is 700; I is 310; and C is given by C =

Return to the simple Keynesian model in Section 18.4 . Suppose that: G is 700; I is 310; and C is given by 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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