Question

A5-10. Suppose the following aggregate expenditure model describes an economy: C = 100 + (5/6)Yd T = (1/5)Y 1 = 200 G = 400 X = 300 IM = (1/3)Y where C is consumption, Yd is disposable income, T is taxes, Y is national income, I is investment, G is government spending, X is exports, and IM is imports. (a) Derive a numerical expression for aggregate expenditure (AE) as a function of Y. Calculate the equilibrium level of national income. Illustrate in a diagram with AE on the vertical and Y on the horizontal axis. (Hint: While solving, do not convert the fractions to decimals.] [6] (b) Calculate the equilibrium levels of disposable income, consumption spending and private saving (S). Is the government running a surplus or deficit? Does the country have a trade surplus or deficit? [8] (c) Now imagine that as a result of international trade tensions exports decrease by 200. What is the new level of national income? Illustrate the effects in your diagram. What is effect on the government's budget? (Hint: Using the multiplier simplifies the calculations.] [6] (d) The government decides to use an increase in government spending to restore national income to its original level. By how much would it have to increase spending? What happens to the government's budget balance? Explain why the government's deficit does not increase by the full amount of the increase in spending. [6]

Answer 1

Ang AFC+I+G+[X-M) 7 10동 la + 200+ Yont (30-1) 2 Toot (V-T) + 2oot root (300 J1) 2 1000 +동사능 하 2 170 + 등(1) 지 1000t 좋아하 AE lovo + by in eam AE=Y or yz let | 2 000 Y2 1500 AE Al - lowothy 150 - - - - - Tomt 1 0 15m

Ydz Y-T Vd ² Y- 1/4 Ydz uy > (1500) PiY2 1500] Yd z 1200 67100+ 5 (1200) z 100 + loco (21100 private saring = Ya-c = 1200-1100 2100

T=/y =Ę (1500) T2 300 G2 400 Deficit of 100. Surplus T-G = 300-4007 2-100 Trade Surplusa X-M ? 300-1/24 2300-1 (1500) 2300-500 2-200 Toade deficit of 200.

(C) x de cocase by 200, and now x will be 100 so AEZ C+I+G+ (X-M) = 100+ 5yd + 2007 400 + (100-4U. loot 5 (7-1/34) + 700-1/34 AE = 800+ 1/24 in eam , Afz Y yz 8007 jy 2 24 2800 Y21200,

A£21000+ 1/ 34 At = 800+ 1/24 1000 t 8oof 7 l when goost X will decrease by Zoo then AE curne will shift below by 20o. And equilibria national income will decrease from 1500 to 1200

Now , Tz 1/24 $(1200) [Newt ya 1200] T 2240 ชา - นุช) government will seen cleficit here by 160. New X=100 MZ (1200) 2400 N there will be tade deficit of 3oo.

(d) 2 original national level of income z 1500 so, we have now, Y2 C+I+G+ CX-m) 15002 louts ydt 200+ 6+ (100st) 1100 = Ely-by) +G - Y 11002 Ļy+G 11002 500+ G [ --471500] - G2 600 To achieve original level of income we need G 2 600 means government has to increase G by 200. Nowi Tz Śy => } {lsoo)2 300 G=600

Government will own deficit of 300. and there will be stroke tarde deficet of = 100-5002-400 X-M2 100-300 =-460 Because of government sector multiplies and fiscal policy multiplies the effect of an Gease in govegument spending would not exactly same in income