Determine the amount of taxes the government receives, and whether the government budget has a surplus or deficit, and how much it is worth.

Question

In a country's economy it is known that it has data; Autonomous consumption = 38, MPC = 0.62, Investment = 30.5, Government spending = 37, government transfer = 20, tax rate = 11%.

Determine the amount of taxes the government receives, and whether the government budget has a surplus or deficit, and how much it is worth.

Answer 1

1. Calculate Aggregate Income (Y): The aggregate income in a Keynesian framework is given by the equation:

Where:

•       C is the consumption function: C = C0 + MPC × (Y - T)

•       C0 is autonomous consumption.

•       MPC is the marginal propensity to consume.

•       I is investment.

•       G is government spending.

•       T is taxes (depends on Y).

1. Initial Calculation Without Considering Taxes (T): Assume T = 0 for the initial calculation.

C = 38 + 0.62 × Y I = 30.5 G = 37 Y = 38 + 0.62 × Y + 30.5 + 37

Solve for Y:

0.38Y = 105.5 Y ≈ 277.63

1. Calculate Taxes: Apply the tax rate (11%) to the aggregate income to find total taxes (T).

T = 0.11 × Y T = 0.11 × 277.63 T ≈ 30.54

1. Re-calculate Aggregate Income with Taxes: Insert the tax value back into the consumption function and re-calculate Y.

C = 38 + 0.62 × (Y - 30.54) Y = 38 + 0.62 × (Y - 30.54) + 30.5 + 37

Solve this equation for Y.

1. Determine Government Budget Status: The government's budget situation is:

Budget = T - (G + Transfers)

Calculate using the values:

Budget = 30.54 - (37 + 20) Budget = 30.54 - 57 Budget ≈ -26.46

A negative value indicates a budget deficit.

This approach gives an approximation of the government's budget situation based on the provided data and economic assumptions.