Suppose Congress decides to reduce transfer payments (such as welfare) but to increase government purchases of goods and services by an equal amount. That is, it undertakes a change in fiscal policy such that ?G -?TR.
a. Would you expect equilibrium income to rise or fall as a result of this change? Why? Check your answer with the following example: Suppose that, initially, c .8, t .25, and Y0 600. Now let ? 10 and ?TR 10.
b. Find the change in equilibrium income, ?Y0 .
c. What is the change in the budget surplus, ?BS ? Why has BS changed? Empir