Question

The fundamental equations in an economy are given as:

Consumption function C =200+0.8yd

Investment function. I=300

Tax. T=120

Government expenditure. G=200

Exports. X=100

Imports M=0.05y

Find the following.

1.The equilibrium level of income.

2.The net exports.

Answer 1

We have given that,

$C = 200+0.8Y_d$

$I=300$

$T=120$

$G=200$

$X=100$

$M=0.05Y$

Consumption Function is C = 200+0.8Y where Y in the income in the economy

a.) At equilibrium level of income

$Y= AE(Aggregate \hspace{1mm}Expenditure)----(1)$

$AE = C + I + G + X – M$

$AE = 200+0.8Y_d + 300 +200 - 0.05Y$

$AE = 200+ 0.8(Y-T)+300+200-0.05Y$

$AE = 200+0.8(Y-120) +300+200-0.05Y$

Using equation(1),

$Y = 200+0.8(Y-120) +300+200-0.05Y$

$Y-0.8Y+0.05Y = 200-96+500$

$0.25Y = 604$

$Y = 2416$

b.) Imports M $= 0.05Y = 120.8$

Net Exports :

$X-M = 100-120.8 = -20.8$

There is deficit in balance trade.