Question

An economy is describe by the following equation. C=10+0.8YD, G=100, X=25, I=65, NT=0.25Y, M=0.4Y, Calculate the equilibrium level of national income, the value of the multiplier and the level of government budget deficit. The object of government policy is to reduce equilibrium national income by $50. Calculate the reduction in government spending necessary to achieve this goal. As an alternative policy, calculate the increase in the direct tax rate that would achieve the same goal. Compare the impact on the federal budget of the two policy alternatives.