Question #50842
. For an economy with a tax rate of 10%, the following is given:
C = 60 + 0.8YD
G = 400
I = 140
NX = 10 - 0.20Y
(I) If the economy produces $1 of extra output, how much of it is;
(a). spent on domestic goods?
(b). import expenditure?
(c). saved?
C = 60 + 0.8YD
G = 400
I = 140
NX = 10 - 0.20Y
(I) If the economy produces $1 of extra output, how much of it is;
(a). spent on domestic goods?
(b). import expenditure?
(c). saved?
Expert's answer
(I) If the economy produces $1 of extra output, it will:
(a) spent on domestic goods 0.8*$1 = $0.8 more.
(b) spent 0.2*$1 = $0.2 more on imports
(c) as savings S = s*Y, s = 1 - c and c = 0.8 in our case, savings will increase by (1 - 0.8)*$1 = $0.2.
(a) spent on domestic goods 0.8*$1 = $0.8 more.
(b) spent 0.2*$1 = $0.2 more on imports
(c) as savings S = s*Y, s = 1 - c and c = 0.8 in our case, savings will increase by (1 - 0.8)*$1 = $0.2.
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I) If the economy produces $1 of extra ouput it will: First calculate the MPC= .8YD YD= 1-.1. because of taxes.... YD=0.9 i.e MPC= .8 (.9)=.72 Spent on domestic goods= Total spent - Imports =.72- [.2(1)] =.72-.2 Spent on domestic goods=.52 b)Spent on imports= .2*1= $0.2 c) Savings= 1-MPC =1-0.72 MPS= .28