For the given information regarding an economy, the value of equilibrium level of income is : $C = 100 + 0.75 Y_d$; $G = 40$; $I = 60$; $t = 0.2$ Here, $C = \text{consumption}$, $Y_d = \text{disposable income}$, $G = \text{Govt. expenditure}$, $I = \text{Investment}$, $t = \text{tax rate}$
Calculating Equilibrium Income
To find the equilibrium level of income ($Y$), we set aggregate demand (AD) equal to national income ($Y$). In this model, AD is the sum of consumption ($C$), investment ($I$), and government spending ($G$).
Aggregate Demand Components
The components are given as:
- Consumption: $C = 100 + 0.75 Y_d$
- Investment: $I = 60$
- Government Expenditure: $G = 40$
- Tax Rate: $t = 0.2$
Disposable Income Calculation
Disposable income ($Y_d$) is income after taxes. Taxes ($T$) are calculated as a percentage of income: $T = t \times Y$. Therefore,
$Y_d = Y - T = Y - (t \times Y) = Y(1-t)$
Substituting the tax rate ($t=0.2$):
$Y_d = Y(1 - 0.2) = 0.8Y$
Consumption Function Adjustment
Substitute the expression for $Y_d$ into the consumption function:
$C = 100 + 0.75 (0.8Y)$
$C = 100 + 0.6Y$
Equilibrium Condition
Equilibrium occurs when $Y = AD$. Aggregate Demand is $AD = C + I + G$. Substituting the values and the adjusted consumption function:
$Y = (100 + 0.6Y) + 60 + 40$
Solving for Equilibrium Income
Combine the terms and solve for $Y$:
$Y = 100 + 0.6Y + 100$
$Y = 200 + 0.6Y$
Subtract $0.6Y$ from both sides:
$Y - 0.6Y = 200$
$0.4Y = 200$
Divide by 0.4:
$Y = \frac{200}{0.4}$
$Y = 500$
The equilibrium level of income is 500.
Important Questions from Macroeconomics
- Real-factor demand-pull inflection can be caused by:
A. Increase in investment
B. Decrease in consumer demand
C. Decrease in imports given the exports
D. Decrease in exports given the imports
E. Decrease in government expenditure without change in tax revenue.
Choose the correct answer from the options given below : Match List-I with List-II:
List-I (Concepts) List-II (Given by) A. Paradox of thrift I. K. Boulding B. Water-Diamond paradox II. A.C. Pigou C. Wage employment paradox III. J.M. Keynes D. Macroeconomic paradox IV. Adam Smith
Choose the correct answer from the options given below:- Which of the followings are the effects of increase in government spending in IS-LM framework in a closed economy?
A. Increase in income by multiplier times government expenditure.
B. Shift in IS curve to the right leading to disequilibrium in money market at given level of interest rate.
C. Quantity of money demand will be higher.
D. Interest rate will decrease.
Ε. Private investment will increase leading to increase in aggregate demand.
Choose the correct answer from the options given below : - If the marginal propensity to consume is 0.8 and initial increase in tax revenues by the government is Rs. 100, then the impact on national income would be:
- Which of the followings are true about New Classical approach.
A. The main protagonist was R.E. Lucas Jr.
B. It is based on adaptive expectation.
C. It was developed during 1950s.
D. Complete wage and price flexibility.
Ε. Difference between actual and expected price is a random error.
Choose the most appropriate answer from the options given below :
