Suppose that the MPC out of disposable income was 0.8 and the tax function for a given economy was T = - 30 + 0.25Y.An increase in the intercept of the tax function of 10 units (from - 30 to - 20)would cause equilibrium income in the simple Keynesian model to fall by

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The equilibrium income in the simple Keynesian model is determined by Y = C + I + G, where C is consumption, I is investment, and G is government spending. Consumption, in turn, is determined by C = a + MPC(Y-T), where a is autonomous consumption and MPC is the marginal propensity to consume out of disposable income (Y-T).

Substituting the given tax function T = -30 + 0.25Y, we can rewrite the consumption function as C = a + 0.8(Y + 30 - 0.25Y) = a + 0.55Y + 24.

An increase in the intercept of the tax function by 10 units (from -30 to -20) means that the new tax function is T = -20 + 0.25Y. Substituting this into the consumption function, we get C = a + 0.55Y + 28.

To find the new equilibrium income, we set Y = C + I + G and solve for Y. Assuming that investment and government spending are unchanged, we have Y = a + 0.55Y + 24 + I + G. Rearranging, we get 0.45Y = a + I + G + 24, or Y = (a + I + G + 24)/0.45.

Comparing this with the original equilibrium income Y = (a + I + G + 30)/0.45, we see that the only difference is in the constant term. Specifically, the new equilibrium income is 4/0.45 = 8.89 units lower than the original equilibrium income.

Therefore, the correct answer is (C) 20 units.

Suppose That the MPC Out of Disposable Income Was 0