In: Economics
In the Keynesian cross model, assume that the consumption function is given by C=$70+0.7(Y−T)C=$70+0.7(Y−T) Planned investment is $200; government purchases and taxes are both $100.
What level of government purchases is needed to achieve an income of $1160? Assume taxes remain at $100.
What level of taxes is needed to achieve an income of $1160? Assume government purchases remain at $100.
C=$70+0.7(Y−T)
Planned investment is $200;
government purchases are 100 and taxes are both $100.
At equilibrium,
Y=C+G+ I
Y= 70+0.7(Y-100)+G+200
Y=70+0.7Y-70+G+200
0.3Y=200+G
G=0.3Y-200
When Y=$1160
G=0.3*1160-200
G=148
So, Government purchases should be $148, in order for income to be $1160.
If Government spending=100 and income=$1160
At equilibrium,
Y=C+G+ I
Y= 70+0.7(Y-T)+100+200
Y=70+0.7Y-0.7T+100+200
0.3Y=370-0.7T
When Y=$1160
0.7T=370- 0.3*1160
0.7T=22
T= 31.42
So tax should be $31.42