Question

The economy has an overall tax rate of \(27 \%\) of national income. The full employment income level is \(\$ 980\) billion. In order to sustain this level, the government must keep its expenditures at \(\$ 296\) billion in addition to private investment and other injections. 1\. Calculate the full employment balance (surplus or deficit for a budget which will just sustain full employment). 2\. Calculate also the surplus or deficit, at an income level of \(\$ 970\) billion, for a budget which has the full employment balance calculated under 1 .

Short answer

1. The full employment budget balance is calculated as follows: Tax Revenue = 0.27 * \(980\) billion = \(264.6\) billion Full Employment Budget Balance = \(264.6\) billion - (\(296\) billion) = -\(31.4\) billion (Deficit) 2. To calculate the surplus or deficit at an income level of \(970\) billion: Tax Revenue (\(970\) billion) = 0.27 * \(970\) billion = \(261.9\) billion Surplus or Deficit (\(970\) billion) = \(261.9\) billion - (\(296\) billion) = -\(34.1\) billion (Deficit)

Step-by-step solution

First, we need to find the tax revenue collected by the government at the full employment income level, which is \(980\) billion. To do this, we can use the overall tax rate provided, which is \(27 \%\). Multiply the tax rate by the full employment income level: Tax Revenue = 0.27 * 980 #Step 2: Calculate the full employment budget balance#

Next, we will calculate the full employment budget balance by comparing the tax revenue collected (which we calculated in step 1) to the government's expenditures and other injections (\(296\) billion) provided. Full Employment Budget Balance = Tax Revenue - (Government Expenditures + Other Injections) #Step 3: Calculate the tax revenue at an income level of \(970\) billion#

Now let's find the tax revenue at an income level of \(970\) billion. Once again, we will multiply the tax rate by this income level: Tax Revenue (\(970\) billion) = 0.27 * 970 #Step 4: Calculate the surplus or deficit at an income level of \(970\) billion#

Lastly, we will calculate the surplus or deficit at an income level of \(970\) billion, using the full employment budget balance we calculated in step 2 and the tax revenue calculated in step 3: Surplus or Deficit (\(970\) billion) = Tax Revenue (\(970\) billion) - (Government Expenditures + Other Injections) With all the above steps, you should be able to calculate the full employment budget balance and the surplus or deficit at specific income levels.

Key concepts

Full Employment Income

Full employment income refers to the maximum level of earnings an economy can generate when all resources, particularly labor, are utilized efficiently. For our scenario, this amount is $980 billion. This level ensures everyone who wants a job can find one without causing inflationary pressure. Knowing this figure helps governments plan budgets to maintain stable economic activity.

To understand its importance, imagine it as an ideal state where the economy is balanced. By using this figure, policymakers aim to shape fiscal measures that sustain growth without overheating the economy.

Government Expenditures

Government expenditures are the total amount of spending by the government in a particular period. In this case, the government plans to spend $296 billion to reach full employment. This includes spending on infrastructure, social services, and other essential areas that support the economy.

Ensuring that expenditures align with an economy's needs is crucial for maintaining growth. Too little spending can lead to unemployment, while excessive spending could cause inflation.

• Helps in stabilizing the economy
• Keeps public services running smoothly
• Supports investments and jobs

Budget Balance

The budget balance measures the difference between a government's revenue (like taxes) and its expenditures. Achieving a balance means that the government collects enough money to cover its expenses without needing additional funds.

To calculate the full employment budget balance, you subtract government expenditures from tax revenue. For instance, if the tax revenue at full employment is sufficient to cover the $296 billion spending, the budget is balanced.

This tool is essential for governments as it helps them plan sustainable fiscal policies and avoid unnecessary debt.

Surplus or Deficit

A budget surplus occurs when tax revenues exceed government expenditures, while a deficit happens when expenses surpass revenues. In our problem, it was necessary to calculate whether there would be a surplus or a deficit at different income levels.

When incomes were at $970 billion, any difference between tax earnings at this level and the planned expenditures indicates a surplus or deficit. Understanding these calculations helps determine whether a government needs to borrow money or can save funds.

• Surpluses can be used to pay off debt or save for future expenses.
• Deficits might require borrowing, impacting future budgets.
• Essential for economic stability and planning.