Y6

2. [3 points] Consider a simple Keynesian model without investment and net exports (i.e., I = N X = 0]. In this economy, the government adjusts purchases to stabilize output uctuations based on the following formula. G = G0.1Y, where Y is output and G is government purchases independent of output. The government also collects income tax T with the income tax rate of 20%: T = 0.21\". Because of the income tax, consumption is a function of after-tax income Y T as C:C+0.75(Y7T). Initially, C' = $10 billion and G = $2 billion. However, the government raises G to $3 billion. How does this policy affect government budget decit G T? Provide intuition