Question

Table 9.3 All Numbers are in $ Million Planned Output Net Planned Government (Income Taxes Consumption Savings Investment Spending 1,000 200 120 200 1,100 200 140 200 1.200 200 840 1,300 200 1,400 200 1,000 1,500 200 1,080 1,600 200 1,160 200 760 Refer to Table 9.3. Suppose the economy is in equilibrium and the government raises taxes from $200 million to $220 million, equilibrium output will_ _ by $_ million. increase; 80 You Answered decrease; 20 Correct Answer decrease; 80 increase: 20

I don't understand how they got this answer. Can you explain please.

Answer 1

At equilibrium, Y = C + I + G

C + S = Y_d , where, disposable income, Y_d = Y - T

Y 1100 200 400 1200 - 200 000 *60 $ 240 100 mpe A 1000 100 +08 (Y-T) 800 Cmoumpliny function, C at y 1000, 200, Y-T SY-T 800 - 120 C 680 1 680s + O'QX800 on 680 . C + 640 Hence, our camoumption function is er 40 + 0'8 (Y-T) At egn. Y = c +I+G. or ye 40+0'8 (Y-200) + 200 + 200 er, ya 440+084 - 160 er, 0.24 = Y = 280 280 = 1400 From the table alos, we can find this value by adding Consumpliow loog million), Inwealment (= $200 million and Goven ment spending 64200) Now, the tases increases to $220 million New consumption function is, c. 40 +08 (Y - 220) At eam.. y = c + 3 + 6 ox, Y = 40 +08 (4-220) + 200 + 200 onY.440 +0'84-176 01 024 : 264 y 1320 Hence, equilibrinem output wil decrease by $(1400 - 1320) million = $ 80 million