Question

An open economy is described by the following system of macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is government tax revenue
Page 14 of 15
I is investment spending
G is government spending
E represents exports
M represents imports of goods and services.
Yf is full employment income
(a) (i) Determine the equilibrium level of income /output. (4)
(b) (ii) Determine the surplus/deficit in the government budget at equilibrium. (4)
(iii) Determine trade balance at equilibrium. (4)
(c) Determine by how much government spending has to be increased in order to achieve full
employment. How does this change affect the budget balance and the trade balance? (An open economy is described by the following system of macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is government tax revenue
Page 14 of 15
I is investment spending
G is government spending
E represents exports
M represents imports of goods and services.
Yf is full employment income
(a) (i) Determine the equilibrium level of income /output. (4)
(b) (ii) Determine the surplus/deficit in the government budget at equilibrium. (4)
(iii) Determine trade balance at equilibrium. (4)
(c) Determine by how much government spending has to be increased in order to achieve full
employment. How does this change affect the budget balance and the trade balance? (An open economy is described by the following system of macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is government tax revenue
Page 14 of 15
I is investment spending
G is government spending
E represents exports
M represents imports of goods and services.
Yf is full employment income
(a) (i) Determine the equilibrium level of income /output. (4)
(b) (ii) Determine the surplus/deficit in the government budget at equilibrium. (4)
(iii) Determine trade balance at equilibrium. (4)
(c) Determine by how much government spending has to be increased in order to achieve full
employment. How does this change affect the budget balance and the trade balance? (An open economy is described by the following system of macroeconomic equations, in which all
macroeconomic aggregates are measured in billions of Namibian dollars, N$.
Y = C + I + G + X – M
C = 160 + 0.6Yd
T = 150 + 0.25Y
I = 150
G = 150
E = 300
M = 50 + 0.1Y, Yf = 1500
Where: Y is domestic income
Yd is private disposable income
C is aggregate consumption spending
T is government tax revenue
Page 14 of 15
I is investment spending
G is government spending
E represents exports
M represents imports of goods and services.
Yf is full employment income
(a) (i) Determine the equilibrium level of income /output. (4)
(b) (ii) Determine the surplus/deficit in the government budget at equilibrium. (4)
(iii) Determine trade balance at equilibrium. (4)
(c) Determine by how much government spending has to be increased in order to achieve full
employment. How does this change affect the budget balance and the trade balance? (

Answer 1

Gross Domestic Product comprises of four main components i.e. Consumption, Investment, Government Purchase and Net Export (Export - Import). If Tax revenue is greater (less) than Government Purchase, we have Budget Surplus (Deficit). If Export is more (less) than import, we have positive (negative) trade balance.