Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.


Given –


C = 100 + 0.75YD


c = 0.75


I = 500,


G = 750


T = 0.20Y


M = 100 + 0.2Y


m = 0.2


X = 150


Equilibrium Income (Y) = C + c (Y - T) + I + G + X - M – mY


Y = 100 + 0.75 (Y – 0.20Y) + 500 + 750 + 150 – 100 – 0.2Y


Y = 1400 + 0.75 (0.8Y) – 0.2 Y


Y = 1400 + 0.6Y – 0.2Y


Y = 1400 + 0.4Y


0.6 Y = 1400


Y = 1400/0.6 = 2333


Govt Expenditure = 750


Govt Receipts (Tax) = 2333 X 20% = 467


Govt Expenditure > Govt Receipts


It shows the government is running budget deficit.


NX = X - M – MY


= =150 - 100 - 0.2 x 2333


= 150 - 100 - 467


= 150 - 567


= - 417


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