Answer to Question #92411 in Macroeconomics for Dee

Question

Given the following variables in the open economy aggregate expenditure model, autonomous consumption (co)=200, autonomous investment (Io)=200, government spending (G0)=100, export spending (Xo)= 100, autonomous import spending (Mo)=100, taxes (Tp)=0, marginal propensity to invest (i1)=0.1, and marginal propensity to import (m1) =0.15.
1. if there's an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, calculate the new equilibrium level of income and the value of the multiplier.
2.compared with the original equilibrium in part a, if the government decides to impose taxes (Tp) of 100, calculate the new equilibrium level of income. Hint: Remember that consumption has an autonomous component and is function of disposable income, Yd,where Yd =Y-Tp.

Answer 1

1. if there's an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, then the new equilibrium level of income will decrease by more than 100 and the value of the multiplier is more than 1.

2.Compared with the original equilibrium in part a, if the government decides to impose taxes (Tp) of 100, then the new equilibrium level of income will decrease by more than 100.