DSE 2010 - macroeconomics

[madhav]

Dear Mr. amit,

First of all thanx a lot for posting the DSE 2010 key.

Please clarify the answer for q.no 42

Suppose and econmy is at less then full employment and it consists of an aggregate worker and an aggregate capitalist..with the former having a higher MPC. suppose both agents pay income tax according to the same linear schedule. if the govt's budget is in balance and a lump-sum income transfer is made from the capitalist to the workers, then the govt's

a) budget will go into deficit
b) budget will go into surplus
c) income & expenditure will be unchanged
d) income and expenditure will change but budget will stay in balance.

[Amit Goyal]

Since workers have a higher MPC, lump-sum income transfer from capitalist to the workers will raise the overall consumption levels and hence the income level of the economy. Tax revenue will thus go up and since govt. expenditure is unchanged budget will go in surplus.

[madhav]

thank you very much amit.