Question

In an open keynesian economy, the domestic households’ consumption Cpl = 100 + 0,75Yd, investment I = 400, the net tax rate t = 0,2, government expenditure on goods and services G = 300, exports X = 200, and the marginal propensity to import MPI = 0,1.

a) Calculate the equilibrium output in this economy.

b) Demonstrate whether leakages equal injections to the circular flow.

Answer 1

Here,

C = 100 + 0.75Yd

I = 400

t = 0.2

G = 300,

X = 200,

MPI = 0.1

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a) Y = C + I + G + NX

Y = 100 + [0.75 x (0.8Y)] + 400 + 300 + 200 - (0.1Y)

Y = 1000 + 0.5Y

0.5Y = 1000

Y = 2000

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b) Leakages = Injections

First, derive the value, of Yd, C, S, M and NT

Now, Yd = C + S

Yd = Y - t

Yd = 0.8Y = 1600

C = 100 + 0.75Yd

Thus, C = 1300

S = 1600 - 1300 = 300

M = 0.1Y = 200

NT = 0.2Y = 400

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To verify,

S + NT + M = I + G + X

Place the values:

300 + 400 + 200 = 400 + 300 + 200

900 = 900

Hence proved, that Leakages = Injections