Answer to Question #194243 in Macroeconomics for Selma Shilongo

Question #194243

QUESTION 1 [30]

An open economy is described by the following system of macroeconomic equations, in which

all macroeconomic aggregate are measured in billions of Namibian dollars, N$:

Y = C + I + G + X – M

C = 160 + 0.6 Yd

T = 100 + 0.25Y

X = 80

I = 150

G = 150

M = 22 + 0.25Y

Where: Y is domestic income

Yd is private disposable income

C is aggregate consumption spending

T is government tax revenue

I is investment spending

X represents exports

M represents imports of goods and services

1.1

(a) Determine the equilibrium level of income/ output. (5)

(b) Illustrate the aggregate spending curve and equilibrium level of income on a diagram. (3)

(c) Determine the surplus/ deficit in the government budget at equilibrium. (4)

(d) Determine trade balance at equilibrium. (4)

(e) Find the multiplier applicable to autonomous tax and interpret it. (4)



1
Expert's answer
2021-05-19T20:32:04-0400

(a)

"Y = C + I + G + X \u2013M"

"= 160 + 0.6 Yd + 150 + 150 +80 - (22 + 0.25Y)"

 "=540 + 0.6 (Y - T) - 22 - 0.25Y"

"=540 + 0.6(Y - (100 + 0.25Y)) - 22 -0.25Y"

"=518 + 0.6Y - 60 - 0.15Y - 0.25Y"

"=458+ 0.2Y"

"Y - 0.2Y = 458"

    "Y = \\frac{458}{0.8}"

      "Y = 572.5"

Equilibrium level of income is 572.5


(b)


(c)

"T = 100 + 0.25Y"

 "= 100 + 0.25(572.5)"

"= 100 + 143.125"

 "=243.125"

Hence the Government budget is in surplus of $243 billion


(d)

Trade Balance"= X - M"

"= 80 - 22 - 0.25Y"

"= 58 - 0.25 \\times572.5"

"= 58 - 143.125"

"= -85.12"

(e)

"Multiplier = \\frac{-c}{(1 - c)}= \n \\frac{-0.6}{(1 - 0.6)}"

"= -1.5"

Where,

c is marginal propensity to consume. 


this means its operating on a deficit


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