Answer to Question #132238 in Macroeconomics for ben

Question #132238

Given the following model:

Consumption: C = 500 + 0.5Yd

 Investment: I = 250

Government Expenditure: G = 100

Proportional Tax Rate: t = 0.1

Imports: M = 0.25Y

Exports: X = 50

(Note: There is no lump-sum tax)


  1. a) If the current level of output is 1000, what is the level of actual investment? (2 marks)
  2. b) Calculate the equilibrium real GDP (2 marks)
1
Expert's answer
2020-09-11T09:07:52-0400

Since this is an open economy, the national income YY is given as below;


Y=C+I+G+XMY=C+I+G+X-M

a) Given YY as 1000, then actual investment can be obtained as


Y=1000, C=500+0.5Yd, G=100,XM=200,M=0.25X1000=250Y=1000,\ C=500+0.5Yd,\ G=100, X-M=200,M=0.25X1000=250

Actual investment

I=YCG(XM)I=1000500+0.5Yd100250I=Y-C-G-(X-M)\\ I=1000-500+0.5Yd-100-250

b) Equilibrium


Y=300+0.5(Y0.1)+250+100+250=500+0.5Y0.05+350+2000.95Y=1050Ye=1105.26Y=300+0.5(Y-0.1) +250+100+250\\ =500+0.5Y-0.05+350+200\\ 0.95Y=1050\\ Y_e=1105.26



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