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IMPORTANT QUESTIONS

1. Explain why the tax multiplier is smaller in absolute value than the government expenditure multiplier.

   Easy View solution
2. Suppose marginal propensity to consume is 0.75 and there is a 20 percent proportional income tax. Find the change in equilibrium income for the following:-
   (a) Government purchases increase by 20
   (b) Transfers decrease by 20.

   Hard View solution
3. We suppose that C = 70 + 0.70Y D, I = 90, G = 100, T = 0.10Y (a) Find
   the equilibrium income. (b) What are tax revenues at equilibrium income? Does the government have a balanced budget?

   Hard View solution
4. 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.

   Medium View solution
5. Consider an economy described by the following functions: C = 20 + 0.80Y, I = 30, G = 50, TR = 100
   (a) Find the equilibrium level of income and the autonomous expenditure multiplier in the model.
   (b) If government expenditure increases by 30, what is the impact on equilibrium income?
   (c) If a lump-sum tax of 30 is added to pay for the increase in government purchases, how will equilibrium income change?

   Hard View solution
6. Suppose that for a particular economy, investment is equal to 200,
   government purchases are 150, net taxes (that is lump-sum taxes minus
   transfers) is 100 and consumption is given by C = 100 + 0.75Y (a) What is the level of equilibrium income? (b) Calculate the value of the government expenditure multiplier and the tax multiplier. (c) If government expenditure increases by 200, find the change in equilibrium income.

   Hard View solution
7. Give the relationship between the revenue deficit and the fiscal deficit.

   Medium View solution
8. ‘The fiscal deficit gives the borrowing requirement of the government’.
   Elucidate.

   Medium View solution
9. Distinguish between revenue expenditure and capital expenditure.

   Medium View solution
10. Explain why public goods must be provided by the government.

    Easy View solution