Calculating the level of income using the balanced budget multiplier
Please help with the following problem.
Assume the government raises taxes by $20 billion and at the same time increases government spending by $20 billion. If the marginal propensity to consume (mpc) = 0.9 and everything else stays constant, according to the expenditure approach we can surmise that the level of income will
a. increase by $200 billion
b. decrease by $200 billion
c. decrease by $20 billion
d. increase by $20 billion
...r increases taxes), it increases (or decreases) people's incomes, which then causes them to consume more (or less), which increases income (or decreases) income again, and so the cycle turns.
The net result is:
deltaY/deltaG = ...