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Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.?
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Suppose that for a particular economy, investment is equal to 200, gov...
Equilibrium Income Calculation:
Given: Investment (I) = 200, Government Purchases (G) = 150, Net Taxes (T) = 100, Consumption (C) = 100 + 0.75Y
Equilibrium income (Y) is calculated using the formula:
Y = C + I + G + (T - T)
Substitute the values:
Y = (100 + 0.75Y) + 200 + 150 + (100 - 100)
Y = 450 + 0.75Y
0.25Y = 450
Y = 1800
Therefore, the level of equilibrium income is 1800.

Government Expenditure Multiplier and Tax Multiplier Calculation:
The government expenditure multiplier is given by the formula:
Multiplier = 1 / (1 - MPC)
Where MPC (Marginal Propensity to Consume) = 0.75
Government expenditure multiplier = 1 / (1 - 0.75) = 1 / 0.25 = 4
The tax multiplier is given by the formula:
Multiplier = -MPC / (1 - MPC)
Tax multiplier = -0.75 / (1 - 0.75) = -0.75 / 0.25 = -3

Change in Equilibrium Income due to Increase in Government Expenditure:
If government expenditure increases by 200, the new equilibrium income is calculated as follows:
New equilibrium income = 450 + 0.75Y + 200
Y = 650 + 0.75Y
0.25Y = 650
Y = 2600
Change in equilibrium income = 2600 - 1800 = 800
Therefore, the change in equilibrium income due to the increase in government expenditure is 800. This increase is a result of the government expenditure multiplier, which magnifies the initial increase in government spending.
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Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.?
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Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.? for Humanities/Arts 2024 is part of Humanities/Arts preparation. The Question and answers have been prepared according to the Humanities/Arts exam syllabus. Information about Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.? covers all topics & solutions for Humanities/Arts 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Suppose that for a particular economy, investment is equal to 200, government purchases are 150, net taxes (that is lump-sum taxes minus transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.?.
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