Question

UMihal GDP in 2018; c) the rates of llGDP between the two years and discuss the r 2. Given the following data re presenting the goods market of an open economy: Marginal Propensity to consume Direct Tax rate Investment Gov. spendin Autonomous consumption Exports Marginal propensity to import Autonomous Imports Transfers Autonomous Taxation 0.55 0.1 4000 9500 340 3000 0.15 100 90 20 Using the Keynesian cross-model, compute: a) The equilibrium level of the aggregate output b) c) d) The value of public savings corresponding to the equilibrium level of the output, say if the country is running a budget deficit or surplus; The value of net exports corresponding to the equilibrium level of the output; say if the country is running a trade deficit or surplus; The value of the aggregate output for which the system would run a trade balance; The variation in the equilibrium level of the aggregate output due to a variation in the government spending equal to AG - 1500; Compute the impact on public savings of the policy adopted in e) and discuss. e) f) 2. After having defined the IS and LM curves, show in a diagram the general equilibrium position of the economic system. Then show on the same diagram and discuss the impact on the equilibrium position of a tightening monetary policy. 4. Define the nominal and the real exchange rates. Then discuss how changes in the real exchange rate affect imports and exports

Answer 1

a) Equilibrium level of aggregate output:-

Y = C+ I + G+X-M

where C= a+by

a= Autonomous Consumption

b= Marginal Propensity to consume

Autonomous expenditures include autonomous tax (TA), transfer payments (TR).

Y = Y – t.Y – TA + TR

t = rate of income tax (e.g. if the rate of income tax is 25 %, then t = 0.25)

Y= 340+.55 (Y-.1Y + 90 -20)+ 4000+ 9500 + 3000-100

Y= 340 +.55Y-.055Y + 49.5 -11 +4000+9500+3000-100

Y-.55Y +.055Y = 16438.5

Y(1-.55 +.055) =16438.5

.505Y=16438.5

Y=32551.48

b) The value of public savings corresponding to equilibrium level of output country is running budget deficit or surplus?

S=Y=32551.48

If this is the situation, then definately country is running surplus budget.

c) The value of net export corresponding to equilibrium level of output country is running trade deficit or surplus.

if net export = Y then economy is neither deficit nor surplus.

d) The value of aggregate output for which trade is balanced?

The net trade balance is measured as the total value of exported goods and services minus the total value of imported products. A trade surplus means that X>M . Therefore aggregate demand (AD) will increase. A trade deficit means that M>X – therefore AD will fall. If X=M, then the trade is balanced, external trade will have a neutral effect on AD.

e) The variation of equilibrium level of aggregate output due to variation in government spending G=1500.

Aggregate output formula is Y = C+I+G+X-M

Y= 340+.55 (Y-.1Y + 90 -20)+ 4000+ 1500 + 3000-100

Y-.55Y +.055Y= 8740 +49.5-11

.505Y= 8778.5

Y=17383.16

f) If government expenditure(9500 to 1500 )reduces aggregate output level also decreases. If aggregate output level decreases saving propensity of an economy also decreases.

2. IS curve and LM curve: The IS-LM model,which stands for "investment-savings, liquidity-money," is a Keynesian macroeconomic model that shows how the market for economic goods (IS) interacts with the loanable funds market (LM) or money market. It is represented as a graph in which the IS and LM curve intersect to show the short-run equilibrium between interest rates and output.

quilibrium level of rate of interest is or0 and equilibrium level of income is oy0 .

Now if monetary policy is tightening Money supply curve will remain same. Rate of interest only will changes with same supply of money. if r will rises or less then either excess demand or excess supply will come in the economy. By adjustment equilibrium amount of r will reach.