Answer :

Given is

C = 20 + 0.80 Y (C = 20 & MPC = 0.8)


I = 30


c = 0.80


G = 50


TR = 100


∆TR = 10


(a) Equilibrium level of income = 1/(1-c) [C + cTR + I + G + c∆TR]


= 1/ (1 – 0.8) [20 + (0.8 X 100) + 30 + 50 + (0.8 x 10)]


= 940


∆Y = 940 – 900 = 40


Change in income due to change in tax


∆Y = -c/1-c X ∆T = - 40


Therefore increase in 10% in transfer will raise the income by 40% and increase in 10 % in tax will decrease the income by 40%


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