SELECT * FROM question_mgmt as q WHERE id=5433 AND status=1 SELECT id,question_no,question,chapter FROM question_mgmt as q WHERE courseId=3 AND subId=59 AND chapterId=606 and ex_no='1' AND status=1 ORDER BY CAST(question_no AS UNSIGNED)

Question:

In the above question, calculate the effect on output of a 10 per cent increase in transfers, and a 10 per cent increase in lump-sum taxes. Compare the effects of the two.

Answer:

MPC = 0.80
= 20
I = 30
G = 50
TR = 100
ΔTR = 10

Equilibrium level of income =
= Rs 940

Change in income = 940 - 900 = Rs 40

Increase in lump-sum tax ΔT = 10

Change in Income
= 10 ×
= - 10 × 4
= - 40

From the above results, we can conclude that increase of 10 percent in transfers will raise the income by 40%.

And, increase of 10% in tax will lead to a fall in the income by 40%.


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