If the consumption function is defined as C = 800 + (0.75)YD, the marginal income tax rate is t = 0.5, and autonomous investment decreases by 50, then the budget surplus will

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Quizplus · Accepted Answer

The decrease in autonomous investment by 50 will reduce the equilibrium income. The multiplier is 1/(1-c(1-t)) = 1/(1-0.75(1-0.5)) = 2. The decrease in income is 50 * 2 = 100. The tax revenue decreases by 0.5 * 100 = 50, and the government spending remains unchanged, so the budget surplus decreases by 50. However, the consumption decreases by 0.75 * 100 = 75, and the tax revenue decreases by 50, leading to a net decrease in the budget surplus by 40.

If the Consumption Function Is Defined as C = 800