Question

Consider a hypothesis economy described by the following equation

C=100

I=1200

X-1110

M=200+0.25Y

T=250+0.3Y

Required

1.Compute the equilibrium level of the national income

2.The level of consumption income after tax and net exports that corresponds to the equilibrium level

national income

Answer 1

1.

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

$Y=100+1200+0+1110-(200+0.25Y)$

$Y=1300+1110-200-0.25Y$

$Y+0.25Y=2410-200$

$1.25Y=2210$

$Y=\frac{2210}{1.25}$

National income Y = 1768

2.

Level of consumption income after tax $(Y_d)=Y-Tax(T)$

$Y=1768$

$T=250+0.3Y=250+0.3(1768)$

$T=780.4$

$Y_D=Y-T=1768-780.4$

$Y_D=987.6$

Net exports=X-M

$X=1110$

$M=200+0.25Y$

$M=200+0.25(1768)$

$M=200+442$

$M=642$

Net exports $=1110-642=468$

The level of consumption income after tax is 987.6 and net exports is 468.