Consider a closed economy in which aggregate output in short-run equilibrium is equal to the level of effective demand. There are only two types of expenditure on goods and services—private consumption expenditure and expenditure by the government . Workers earn only wage income and non-workers earn all remaining income. Non-workers always spend a fixed amount on consumption. Suppose to produce every rupee of final output, 0·005 labour-day is required and the wage for a working day is Rs 150.
Suppose workers consume a fraction 0·8 of their income and the only tax revenue comes from lump sum direct taxes imposed on non-workers. What is the value of the balanced budget multiplier?
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