ISI 2004 Q1 (v)

[L]

Consider a simple Keynesian economy in which the government
expenditure (G) exactly equals its total tax revenue: G = tY where t
is the tax rate and Y is the national income. Suppose that the
government raises t. Then
(A) Y increases;
(B) Y decreases;
(C) Y remains unchanged;
(D) Y may increase or decrease.

In this question, is it right to assume that when govt. raises t, then, it does not raises G which implies that Y will decrease. But, if G is raised proportionally, then, should Y remain unchanged?
Also, have anyone of you able to prove balanced budget multiplier in case of proportional taxes? If yes, then how?

[Anakin Skywalker]

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[kk]

the income will increase.if we take into account the disposable income..Y-C+I+tY  (AS G=tY)
THEREFORE Y=C+c(Y-tY) +I+tY
SO  Y= (C+I)/ [1-{c(1-t)+t}]
 WHEN TAXES INCREASE THAT IS BECOME t'y
  Y'=(C+I)/ [1-{c(1-t')+t'}]
THE DENOMINATOR OF Y' IS LESS THAN Y..THEREFORE Y' IS MORE..SO INCOME RISES.

[Anakin Skywalker]

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