Question #87509

Suppose the consumption function is C=100+0.95YD. If the tax rate changes from t=0 to t=30%, then the increase in govt spending that leaves equilibrium income unaffected is what ?

YD= disposable income

The answer is 570 , but can you help explain how they got to this?

Tks

YD= disposable income

The answer is 570 , but can you help explain how they got to this?

Tks

Expert's answer

If t = 0, then T = 0, so C = 100 + 0.95(Y - T) = 100 + 0.95Y.

If t = 0.3, then T = t*Y = 0.3Y, so C = 100 + 0.95(Y - 0.3Y) = 100 + 0.665Y, so the consumption will decrease by 0.285Y and government spending should increase by this amount to leave equilibrium income unaffected.

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## Comments

Assignment Expert08.04.19, 16:49Dear Michelle pinato, 0.95*(1-0.3)=0.665

Michelle pinato05.04.19, 18:20How did you get to 570 ? Also how did you get 0.665 and 0.285?

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