Question

Government spending in Robok is $200 billion, and its only tax is an income tax with a marginal tax rate of 0.4.

a. The balance on the government’s budget at a GDP level of $380 billion is a  (Click to select)  deficit  surplus  of $  billion.

b. The balance on the government’s budget at a GDP level of $580 billion is a  (Click to select)  deficit  surplus  of $  billion.

c. At what level of GDP will the economy of Robok have a balanced budget?

   Robok will have a balanced budget at a GDP level of $  billion.

Answer 1

(a)

GDP = $380 billion

Tax rate = 0.4

Tax = GDP * tax rate

Tax = $380 billion * 0.4 = $152 billion

The tax collected is $152 billion

Government spending = $200 billion

In this case, government spending exceeds the tax collected. So, government's budget is in deficit.

Calculate Deficit -

Deficit = Government spending - Tax collected

Deficit = $200 billion - $152 billion = $48 billion

Thus,

The balance on the government's budget at a GDP level of $380 billion is a deficit of $48 billion.

(b)

GDP = $580 billion

Tax rate = 0.4

Tax = GDP * tax rate

Tax = $580 billion * 0.4 = $232 billion

The tax collected is $232 billion

Government spending = $200 billion

In this case, government spending is less than the tax collected. So, government's budget is in surplus.

Calculate Surplus -

Surplus = Tax collected - Government spending

Surplus = $232 billion - $200 billion = $32 billion

Thus,

The balance on the government's budget at a GDP level of $580 billion is a surplus of $32 billion.

(c)

Budget is said to be balanced when government spending is equal to the tax collected.

Government spending = Tax collected

$200 billion = 0.4 * GDP

GDP = $200 billion/0.4 = $500 billion

Thus,

Robok will have balanced budget at a GDP level of $500 billion.