00:01
Okay, this is an analysis that we look at in order to determine what action government can take in an economy when it has a target of increasing economic activity or output further by $60 billion.
00:24
Okay, so first of all, you can just resort to the normal.
00:31
National income graphs where we can have investment and we can have expenditure e on the vertical axis and you have national income y on the horizontal axis so obviously this graph is equal to y so but but you know that we have autonomous expenditure or autonomous investment in this that's why you would find that the graph for for the consumption function can be given by a is equal to c the consumption is able to a plus b y okay so generally this is the formula for the consumption function that we're familiar with but i don't want us to look at that in that regard because the question requires of us to look at solutions to what the government will aim to do so if we can just express this as c plus i because we are given the national propensity to consume that's going to help our analysis okay so there is going to be a change in the injections here obviously in order for us to arrive at let's just call this z12 this is c11 if there's going to be change in the injections here if we say from i1 to i2 so the question really looks at if this was perhaps the original income level right the government intends that the change from y1 to y1 to y2 be 60 billion dollars.
02:43
Okay and we are given that the consumption, the emotional propensity to consume mpc is equal to 0 .5.
02:55
Now obviously when you have these mpc is easy to then derive the multiplier you we know that the multiplier is simply the it's given by the formula one over one minus mpc one of one minus mpc so get a quick calculation of how much injections would need to increase in order for the income national income to increase by 60 billion we simply have to use the multiplier formula to say we have 60 billion that we already have given there and should be equal to the change in the investment that is i2 minus i1.
03:49
Or we can simply, instead of using this, we can just say change in the injection rather because that would be one.
04:00
We need to find okay so change in the investment and we have one minus 0 .5 okay so if we are going to make change in investment subject of the formula so it simply means our answer they the change in the in the in the in the injections should be 30 billion in order for the government to meet its target of 60 billion if the multiplier is 1 over 0 .5.
04:37
So basically with that in mind, the question would be, since the government is already running a deficit, so what should it do in order to increase this? so it's going to depend on many factors, but the chief factor here is that although the government is already running a deficit, if it does decrease its taxes as an expansionary mechanism, a decrease in taxes, what it entails is there is going to be obviously a decrease in the revenue base, a decrease in the revenue base.
05:28
And so with it goes the decrease in the ability to repay it's deficit.
05:37
But importantly, is the increase in national income.
05:46
So by how much national income is going to increase compared to the decrease in the revenue base, obviously given that the multiplier is 1 over 0 .5, it simply means, yes, this would be an ideal scenario that the multiplier is 1 .5.
06:08
Will in the short term reduce the taxes...