Answer to Question #221082 in Macroeconomics for DARRYL

Question #221082

A.   Now, assuming the economy is open with government (G) participation and  external trade which is summarized as follows; export(X)= 100-0.10Y, import(M)=50, G=100, Taxes(T)= 100 and C, I, MS, Mt, and Mz the same as defined in (a) above. Calculate;

   i.           The equilibrium income and interest rate in this new economy.         

  ii.           The level of C, I, Mt, and Mz when the economy is in equilibrium      

 


1
Expert's answer
2021-07-30T14:26:01-0400

Solution


IS=Y=C+I+G+T+(XM)IS= Y= C+I+G+T+(X-M)


Y=102+0.7Y+150+100+(1000.10Y50)Y=102+0.7Y+150+100+(100-0.10Y-50)


Y=1255250r(ISCurve)Y=1255-250r (IS Curve)


LM=437.5+500rLM=437.5 +500r


At equilibrium

IS=LM


1255250r=437.5+500r1255-250r=437.5 +500r


solve for r

r= 1.09 is equilibrium rate of interest


Y=1255250rY=1255-250r


Y=982.5Y= 982.5 is equilibrium income


2. C=102+0.7YC=102+0.7Y


C=102+0.7×982.5C= 102+0.7\times982.5 =789.75=789.75


I=150100rI=150-100r


I=150100×1.09=41I=150-100\times1.09=41


Mt=0.4YMt=0.4Y


Mt=0.4×982.5Mt= 0.4 \times 982.5 =393=393


Mz=125200rMz=125-200r


Mz=125200×1.09=93Mz=125-200\times1.09=-93


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