Suppose C = 40 + 0.80Yd, I=70, G = 68, marginal propensity to tax = 0.10, X=53 and marginal propensity to import = 0.05 (C= consumption, I= investment , G = government expenditure, X = exports, Yd = disposable income) A. Find the equilibrium level of income B. What is the net tax revenue at equilibrium income? Does the government have a balanced budget? C. Find the net export balance at the equilibrium level of income. D. What happens to equilibrium income and net export balance when investment increases from 70 to 90? E. What has happened to the relationship of government spending and tax revenues? Why? While calculating equilibrium level of income They've taken consumption as 40+0.80(Y-0.10Y). Why?
Yd was used in the old syllabus to denote disposable income, which is the income you have left after income tax to dispose of, ie spend , how you choose, eg on consumption or savings. So, here, if the marginal propensity to pay (income) tax is 0.10, ie the income tax rate is 10%, then out of each extra dollar of income you receive, $0.10 is paid to the government as tax, leaving you with $0.90 to spend as you choose. So, your disposable income is: Yd = Y - 0.1Y = 0.9Y Consumption is then given by: C = 80 + 0.8Yd = 80 + 0.8*(Y - 0.1Y) = 80 + 0.8*0.9Y = 80 + 0.72Y Disposable income is not mentioned in the current course, but did appear in one of the questions on the IFoA's April 2014 CT7 exam.
