Question 9

a) The government's budget balance is equal to T-G. If G is $155 billion for any level of national income, the balance is straightforward to compute. The completed table is shown below.

National Income (Y)	Net Tax Revenues (T)	Budget Balance (T-G)
100	45	-110
200	70	-85
300	95	-60
400	120	-35
500	145	-10
600	170	15
700	195	40
800	220	65

b) We are told that T = t0 + t1Y. The net tax rate (t1) is the amount by which net tax revenues rise in response to a rise in national income. In this case, each $100 billion increase in real national income leads to a $25 billion increase in net tax revenues. Thus, the value of t1 is 0.25. Also, since net tax revenues are linearly related to Y, we can see that if Y were zero, net tax revenues would equal $20 billion. So the value of t0 is $20 billion.

c) The interpretation of t0 is the level of net tax revenues that would exist if national income were zero. This is the value of net tax revenues that are not related to the level of national income.

d) The interpretation of t1 is the net tax rate - the amount by which net tax revenues rise as a result of a $1 increase in national income.

e) The increase in G by $15 billion means that the budget balance falls by $15 billion at each level of national income.