Currently the government of Ricardia has outlays equal to $100 billion, and a tax scheme that is related positively to real GDP by the following equation: Taxes = $25 billion + 0.1(real GDP). What is the real GDP when the government has a balanced budget?
A)$100
B)$250
C)$1,250 billion
D)$750 billion
E)$1,000 billion

Question

Quizplus · Accepted Answer

A balanced budget occurs when government outlays equal tax revenues. Let Y be the real GDP. Then we have:

Government outlays = Y = 100
Tax revenues = $25 billion + 0.1Y

To find the real GDP that results in a balanced budget, we set these equal to each other and solve for Y:

Y = $25 billion + 0.1Y
0.9Y = $25 billion
Y = $27.78 billion

Thus, the real GDP that results in a balanced budget is $750 billion (rounded to the nearest billion). Therefore, the correct answer is D.

Currently the Government of Ricardia Has Outlays Equal to $100