Question

Consider the following consumption function: C(Y)=0.8 (Y-T), where Y represents income and T represents net taxes. Suppose that investment, I, is 100; government spending, G, is 200; and, net taxes, T, are 100. The budget deficit is equal to: a.-200 b.0 c. 300 d. 100

Answer 1

The budget deficit is equal to: d. 100. This is because budget deficit refers to the excess of government spending over government revenue. Here, government spending is 200 and net taxes are 100. Therefore, the budget deficit would be 100.Keyword 1: budget deficitKeyword 2: net taxesThe consumption function can be given as:C(Y) = 0.8(Y-T)where C(Y) is the consumption function, Y is the income, and T is the net taxes. It shows the relationship between income and consumption. Investment, I, is 100 and government spending, G, is 200. Here, net taxes, T, are 100. Thus, the consumption function can be written as:C(Y) = 0.8(Y-100)Now, the budget deficit can be calculated as the difference between government spending and government revenue:Budget Deficit = G - (T+0.8(Y-T)+I)Substituting the given values, we get:Budget Deficit = 200 - (100+0.8(Y-100)+100)Solving this equation, we get the budget deficit as 100.