Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd

Question

Given the basic Keynesian model-as a starting point: Y = C + I + G C = a + b Yd I = f (i) I ? f (Y) ie., MPI* = 0 G = Go Tx = Txo * MPI to represent marginal propensity of invest (NOT import) Assume S = -5 + .25Y, then a $10 billion increase in government spending financed by a $10 billion tax increase would: (Think and apply what you know) (Points : 3) have no effect on income. lower the level of income by $30 billion. raise the level of income by $10 billion. raise the level of income by $40 billion.

Explanation / Answer

Option C is correct.

When the government spending and taxes increases by the same amount, then according to balanced budget multiplier of value 1 would raise the income level by the same increase in spending and taxes.

As in this question, spending and taxes increases by$10 billion, then the income increase would also be = $10 billion.

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