Question

given a model with the following structural quations
y = c + I + G + (X - M) where
C = 30 + 0.75Y
I = N80 million
G = 120 million
X = 20 million
M = 5 + 0.2 y
determine
i) equilibrium national income
ii) income multiplier
b analyze the import demand equation
use a numerical example to define and explain the concept of multipier

Answer 1

$Y=30+0.75Y+80+120+(20-5+0.2Y)$

$Y=30+80+120+20-5+0.75Y+0.2Y$

$Y=110+120+15+0.95Y$

$Y=245+0.95Y$

$Y-0.95Y=245$

$0.05Y=245$

$Y= \frac{245}{0.05}$

$Y=4900$

Income Multiplier=$\frac{Y}{G}$

$= \frac{4900}{120}$

$=40.8$

$=41$

Import Demand Equation

$M=5+0.2Y$

$=5+0.2(4900)$

$=5+980$

$=985$

Multiplier is the link amid the government expenditure and total national income. For instance, 2x would double the base figure while 0.5x would reduce the base figure by half.