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CA Foundation · Business Economics · Determination of National Income

In a three-sector closed economy, C = 100 + 0.75Yd, I = ₹200 crore, G = ₹300 crore and there is a lump-sum tax T = ₹200 crore. If the government raises both G and T by ₹100 crore each (balanced budget), by how much does equilibrium income change?

Income rises by ₹100 crore. The extra spending of ₹100 crore raises income by 400 through a multiplier of 4, while the extra tax of ₹100 crore lowers it by 300 through a multiplier of -3. The net effect equals the size of the budget change, as the balanced budget multiplier is one.

  1. ARises by ₹400 crore
  2. BRises by ₹100 croreCorrect
  3. CFalls by ₹100 crore
  4. DRises by ₹300 crore

Explanation

Government spending multiplier = 1/(1-0.75) = 4, so ΔY from G = 400. The tax multiplier = -0.75/0.25 = -3, so ΔY from T = -300. Net change = 400 - 300 = +₹100 crore, equal to the rise in G (balanced budget multiplier = 1). The ₹400 crore option ignores the tax effect, and ₹300 crore ignores the spending effect.

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