Question

Given the following parameters of an economy, how large is its budget surplus at the equilibrium level of income? Equilibrium condition= Y= C+I+ G+ NX Consumption = 10+.75Y disposable Taxes = .20Y(marginal tax rate) I= 5 G=10 NX=5 In the question, how much does that economy save at the equilibrium level of income? Apply the saving function, as Savings = -a(dissavings)+ MPS ( disposable income)

A. 15
B. 5
C. 10
D. None of the other answers are correct

Answer 1

Scales balanced, surplus shines, at income's peak, fourteen combine. Savings whisper, twenty-four's call, but question whispers, budget's thrall. Choose wise, dear reader, balance sought, the answer sings, not the thought.

Finding the Budget Surplus and Savings at Equilibrium:

Step 1: Solve for Equilibrium Income (Y):

Substitute the consumption function and given values into the equilibrium equation:

Y = 10 + 0.75Y + 5 + 10 + 5

0.25Y = 30

Y = 120

Step 2: Calculate Budget Surplus:

• Government revenue (from taxes) = 0.20 * 120 = $24
• Government expenditure = 10
• Budget surplus = Government revenue - Government expenditure = 24 - 10 = $14

Step 3: Calculate Savings (use the provided formula):

• Assume there's no dissaving (a = 0)
• Marginal Propensity to Save (MPS) = 1 - Marginal Propensity to Consume (MPC)
• MPC = 0.75, therefore MPS = 1 - 0.75 = 0.25
• Savings = -0(0) + 0.25 * (Disposable Income)

Note: We need to find the Disposable Income first:

• Disposable Income = Y - Taxes
• Disposable Income = 120 - 24 = $96
• Savings = 0 + 0.25 * 96 = $24

Therefore:

• The budget surplus is $14 (Option B).
• The savings are $24 (not listed in the provided options).

Remember, the question only asked about the budget surplus. The additional information about savings was for your understanding.