Suppose C = 40 + 0.8Y D, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y (a) Find equilibrium income. (b) Find the net export balance at equilibrium income (c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 and 50?

Question

Philoid · Accepted Answer

Given

C = 40 + 0.8YD

T = 50

I = 60

G = 40

X = 90

M = 50 + 0.05Y

Equilibrium Income (Y) = A / 1 – c + m

A = C – cT + I + G + X - M

Y = C – cT + I + G + X - M/1 – c + m

= 40 – (0.8 x 50) + 60 + 40 + 90 - 50 / 1 – 0.8 + 0.05

= 560

Net exports at equilibrium income

NX = X - M – mY

= 90 – 50 – (0.05 x 560)

= 12

When G increase from 40 to 50, Equilibrium income (Y)

Y = C – cT + I + G + X - M/1 – c + m

= 40 – (0.8 x 50) + 60 + 50 + 90 - 50 / 1 – 0.8 + 0.05

= 600

Net export balance at equilibrium income

NX = X - (M + mY)

= 90-50-0.05x600

= 10