Question

How do changes in disposable income afgect government ourchases and the government purchase function? How do changes in ner taxes affect the consumption function?

Answer 1

Disposable income is the imcome that is left with a consumer after the deduction of taxes. If Y is the income of the consumer, T is the taxes, then disposable income= Y-T

If the disposable income increases, this means that the taxes are reducing. A reduction in taxes means, the revenue of the government is decreasing. This would cause a decrease in the budget of the government which is given by the difference between the government revenue and expenditure. As the budget decreases, the government would be left with less budget and would reduce the amount of government purchases

The disposable income of the consumer decreases when the taxes increase. An increase in the taxes would incre the governments revenue, so would cause an increase in the budget. With more budget in hand the givernment purchases would increase.

An increase in the disposable income means that the consumers are paying less taxes and are left with more income to spent. This would enable them to increase their consumption spending. On the other hand, iff the disposable income reduces, the consumer would be left with less income and this would cause a reduction in their consumption.