Answer to Question #221082 in Macroeconomics for DARRYL

Question

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, M_S, M_t, and M_z 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, M_t, and M_z when the economy is in equilibrium      

 

Answer 1

Solution

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

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

$Y=1255-250r (IS Curve)$

$LM=437.5 +500r$

At equilibrium

IS=LM

$1255-250r=437.5 +500r$

solve for r

r= 1.09 is equilibrium rate of interest

$Y=1255-250r$

$Y= 982.5$ is equilibrium income

2. $C=102+0.7Y$

$C= 102+0.7\times982.5$ $=789.75$

$I=150-100r$

$I=150-100\times1.09=41$

$Mt=0.4Y$

$Mt= 0.4 \times 982.5$ $=393$

$Mz=125-200r$

$Mz=125-200\times1.09=-93$