Question

. Assume that production in the United States is valued at $200,000. National income is therefore $200,000. Of their income, workers save $8000, pay $12,000 in taxes, spend $174,000 on consumer goods, and spend $8,000 on imports. Businesses spend $10,000 in new investment spending. Foreigners spend $6,000 on exports. To avoid any problems of inflation or unemployment, the government should have a budget deficit or surplus of:

Answer 1

To avoid any problems of inflation or unemployment, the government should have a budget deficit of $6,000.

Step-by-step explanation:

National income (Y) = $200,000

Consumption expenditure (C) = $174,000

Investment (I) = $10,000

Net exports (NX) = Exports - Imports = $6,000 - $8,000 = $2,000

we know that,

Y = C + I + G + NX

$200,000 = $174,000 + $10,000 + G - $2,000

G = $200,000 + $2,000 - $174,000 - $10,000

G = $18,000

So, government purchases is $18,000.

It has been provided that workers had paid $12,000 in taxes. This means, the government revenue is $12,000.

Government has spent $18,000 but has collected only $12,000 as taxes. Since, government expenditure exceeds government revenue (tax collection), there will be budget deficit.

Budget deficit = Government expenditure - Government revenue = $18,000 - $12,000 = $6,000

Therefore, to avoid any problems of inflation or unemployment, the government should have a budget deficit of $6,000.