Assume in a private economy that the equilibrium level of income is $410 and the MPS is 0.25. Now suppose government collects taxes of $65 and spends the entire amount. Calculate the new equilibrium level of income.

To calculate the new equilibrium level of income, we first need to understand the concept of the multiplier. The multiplier is the ratio of the change in income to the change in investment. It is calculated as 1/(1-MPS) or 1/MPS.

Step 1: Calculate the multiplier Given that the Marginal Propensity to Save (MPS) is 0.25, the multiplier would be 1/(1-0.25) = 1/0.75 = 1.33.

Step 2: Calculate the change in income The government collects taxes of $65 and spends the entire amount. This is an injection into the economy, which will increase the income. The change in income is calculated as the multiplier times the change in spending. In this case, the change in spending is$65 (government spending - taxes = $65 -$0 = $65). So, the change in income is 1.33 *$65 = $86.45.

Step 3: Calculate the new equilibrium level of income The new equilibrium level of income is the old equilibrium level plus the change in income. So, the new equilibrium level of income is $410 (old equilibrium level) +$86.45 (change in income) = $496.45.

So, the new equilibrium level of income is $496.45.