# in an ecomomy where additional tax revenue of government is equal to additional expenditure by the giv would there be any impapcf on national income explain class 12

Somya is right. We know that National Income =

*C + I + G + (X- M)*

Let us understand this concept with the help of the following example.

Suppose additional expenditure by government is Rs 10 crore. Similar to investment multiplier, additional expenditure by government will cause a multiplier effect in the economy. Now, let us assume the value of MPC = 0.5 and thus value of multiplier is 2.

$\therefore \u2206Y=k\u2206G=2\times 10=20\mathrm{crore}$

Thus, with the additional expenditure of Rs 10 crore, income increases by 20 crore.

Now, additional tax revenue of Rs 10 crore decreases the consumption expenditure by 5 crore.

$\u2206C=MPC\times \u2206T=0.5\times 10=-5\mathrm{crore}$

We know,

$MPC=\frac{\u2206C}{\u2206Y}\phantom{\rule{0ex}{0ex}}0.5=\frac{-5}{\u2206Y}\phantom{\rule{0ex}{0ex}}\u2206Y=-10\phantom{\rule{0ex}{0ex}}\phantom{\rule{0ex}{0ex}}$

Thus, with the additional tax revenue of Rs 10 crore, income decreases by 10 crore.

$\mathrm{Hence},\mathrm{change}\mathrm{in}\mathrm{national}\mathrm{income}\left(\u2206Y\right)=\mathrm{Rs}20\mathrm{crore}-\mathrm{Rs}10\mathrm{crore}=\mathrm{Rs}10\mathrm{crore}$

So we can conclude that when additional tax revenue of government is equal to additional expenditure, then the national income will increase (by the amount of change in government expenditure).

Regards,

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