Now we look at the role taxes play in determining equilibrium income. Suppose we havean economy

of the type in Sections 9-4 and 9-5, described by the following functions:

C = 50 + 0.8YD

I = 70

G = 200

TR = 100

T = 0.20

(a) Calculate the equilibrium level of income and the multiplier in this model.

(b) Calculate also the budget surplus, BS.

(c) Suppose that t increases to 0.25. What is the new equilibrium income? The new multiplier?

(d) Calculate the change in the budget surplus. Would you expect the change in thesurplus to be more

or less if c = 0.9 rather than 0.8?

(e) Can you explain why the multiplier is 1 when t = 1?