Answer :

Given is

c = 0.75


t = 0.20


(a) Change in equilibrium income if Government purchases increase by 20


∆Y = [1/1-{c (1-t)}] X ∆G, where ∆G is 20


= [1/1 – {0.75X0.80}] X 20


= 50


(b) Change in equilibrium income if transfers increase by 20


∆Y = (c/1-c) X ∆T


= (0.75/1-0.75) X 20


= 60


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