Answer to Question #206081 in Macroeconomics for Muskan saifi

Question

Given the following information, find

(a) Equilibrium level of GDP

(b) Marginal propensity to save

(c) Marginal propensity to spend

(d) Net Export function

C = 100 + 0.6YD

I = 500 crore

G = 800 crore

T = 200 crore

X = 200 crore

M = 50 + 0.3Y

Also, explain the Net Exports function using diagram & give reason for its negative

slope. Answer briefly, why does the Net Exports function shift?

Answer 1

(a)

$Y=C+I+G+X-M\\Y=100+0.6YD+500+800+200-(50+0.3Y)\\Y=100+0.6(Y-T(+500+800+200-50-0.3Y\\Y=100+0.6(Y-200)+500+800+200-50-0.3Y\\Y=1550+0.6Y-120-0.3Y\\Y=1430+0.3Y\\Y-0.3Y=1430\\0.7Y=1430\\Y=2042.86$

(b)

Marginal propensity to save (MPS)=Marginal propensity to consume (MPC)

MPC=Slope coefficient of consumption function=0.6

$MPS=1-0.6\\=0.4$

(c)

Marginal propensity to consume or spend (MPC)=slope coefficient of consumption function

$0.6$

(d)

Net Export function ( NX)

$X=200\\M=50+0.3Y\\NX=X-M NX=200-50-0.3Y\\NX=150-0.3Y$

(e)

The negative slope is based on marginal propensity to import because the net export are different between exports and imports and the induced change in imports causes an opposite change net exports.

(f)

The net export function shift due to unfavorable changes such as increase in price level in domestic economy and decrease in gross domestic product of economies.