Question

Assume:

C = 40 + 0.8(Y - T)

G = 10

I = 20

T = 0, where T are taxes.

a. Calculate Y at equilibrium

b. Calculate C, I, and G at equilibriu

(c)           Now assume,

EX = 5 + 4EP /P

IM = 10 + 0.1 (Y - T) - 3EP /P

E = 3

P = 1.5

P = 2

Find equilibrium Y.

Answer 1

(a)

At Equilibrium,

Y = C + G + I

Y = 40 + 0.8(Y - T) + 10 + 20

Y = 70 + 0.8(Y - 0)

Y - 0.8Y = 70

0.2Y = 70

Y = 350

The equilibrium Y is 350.

(b)

C = 40 + 0.8(Y - T) = 40 + 0.8(350 - 0) = 40 + 280 = 320

The C at equilibrium is 320.

The G at equilibrium is 10.

The I at equilibrium is 20.

(c)

EX = 5 + 4EP/P = 5 + [(4*3*1.5)/2] = 5+ 9 = 14

IM = 10 + 0.1(Y - T) - 3EP/P = 10 + 0.1Y - [(3*3*1.5)/2] = 10 + 0.1Y - 6.75 = 3.25 + 0.1Y

At equilibrium,

Y = C + I + G + EX - IM

Y = 40 + 0.8(Y - T) + 20 + 10 + 14 - (3.25 + 0.1Y)

Y = 84 + 0.8Y - 3.25 - 0.1Y

Y = 80.75 + 0.7Y

Y - 0.7Y = 80.75

0.3Y = 80.75

Y = 80.75/0.3 = 269.1667

The equilibrium Y is 269.1667