Question

Assume that the multiplier in the Chinese economy is 3 and autonomous investment expenditures increase by $100. The Chinese government has a budget deficit of $100 and the income tax rate is 30 percent. The increase in autonomous investment expenditures will:
A. increase equilibrium income by $300 and cause the budget deficit to decrease by $90.
B. increase equilibrium income by $300 and cause the budget deficit to decrease by $100.
C. increase equilibrium income by $300 and cause the budget deficit to increase by $100.
D. increase equilibrium income by $300 and cause the budget deficit to increase by $90.

Answer 1

Answer:

A. increase equilibrium income by $300 and cause the budget deficit to decrease by $90.

Explanation:

Change in income = Multiplier * Change in investment

Change in income =  $3 * 100

Change in income = $300

So, Income tax increase by = $300 * 0.3

= $90. Government expenditure is unchanged. So, Budget deficit (G-T) decreases by $90.