Consider the standard income expenditure model where there are both autonomous and proportional taxes in a closed economy. Assume that, G = 100, I = 100, MPC = 0.75, A = 25, T = 25 and t = 1.
a. Calculate equilibrium Y.
b. Explain how much is the government's budget deficit?
c. The government attempts to balance its budget by reducing its spending equal to the deficit from (b). Recalculate Y and the governmemt's deficit. Is the budget balanced?
d.The government didn't like the results of (c). So instead of reducing spending to balance the budget, in increases autonomous taxes equal to the deficit ic (b). Recalculate Y and the governmemt's deficit. Is the budget balanced?
e. The government is very demanding and hence didn't like the results of either of those first two efforts. So this time it keeps both T, G the same and assumes that Y is the amount you found in (b). Given those three numbers, what t will balance the budget?
f. Given your answer in (e), recalculate Y and the governmemt's deficit. Is the budget balanced?