Question

. Suppose an economy is represented by the following equations.

Consumption function C = 200 + 0.8Yd

Planned investment I = 400

Government spending G = 600

Exports EX = 200

Imports IM = 0.1Yd

Autonomous Taxes T = 500

Marginal Tax Rate t=0.2

Planned aggregate expenditure AE = C + I + G + (EX - IM)

By using the above information calculate the equilibrium level of income for this economy and explain why fiscal policy becomes less effective in an open economy

Answer #1

C = Consumption function

I = Investment

G = Government spending

NX = Export - Import

Yd = Y - T

The equilibrium is given by:

Y = AE

Y = C + I + G + NX

Y = 200 + 0.8(Y-500) + 400+ 600 + 200 - 0.1(Y-500)

Y = 200 + 0.8Y - 400 + 400 + 800 - 0.1Y + 50

Y = 1050 + 0.7Y

0.3Y = 1050

Y = 3500

Hence, the equilibrium level of income is Y = 3500

It shall be noted that fiscal policy becomes less effective in an open economy because, with the increase in the income circulation in the economy with the adoption of expansionary fiscal policy, there occurs a leakage in the form of increasing imports with the increasing level of disposable income. As the imports increase with the increase in disposable income, that portion of income used to buy increased imports would not be a part of aggregate spending on the domestic goods & services.

. Suppose an economy is represented by the following
equations.
Consumption function C = 200 + 0.8Yd
Planned investment I = 400
Government spending G = 600
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.2
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level
of income for this economy and explain why fiscal policy becomes
less effective...

Suppose an economy is represented by the following
equations.
Consumption function C = 300 + 0.8Yd
Planned investment I = 400
Government spending G = 500
Exports EX = 200
Imports IM = 0.1Yd
Autonomous Taxes T = 500
Marginal Tax Rate t=0.25
Planned aggregate expenditure AE = C + I + G + (EX - IM)
By using the above information calculate the equilibrium level of
income for this economy and explain how multiplier changes when we
have an...

Consider an open economy. Let e denote the real exchange rate
and Y denote income. Suppose e = 1.5. Let consumption be given by C
= 500 + 0.8Yd, exports be given by EX = 200 + 0.9e, and imports be
given by IM = 150 + 0.2Yd - 0.5e. Finally, let domestic investment,
government purchases and taxes be, respectively, I = 300, G = 200
and T = 120.
1. What is the import balance?
2. What is the...

1. Suppose the United States economy is represented by the
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Yd is disposable income, T is taxes, I is investment and G is
government spending. Y is income/production. (a) Assume that the
economy is in equilibrium. What does it mean in terms of the...

Suppose that you have the following information for an
economy:
Marginal propensity to consume - MPC
0.80
Autonomous consumption - A
$500
Planned investment - PI
$600
Net exports - NX
-$400
Government spending - G
$300
You will need this information for the questions that
follow.
Part 1:
When real GDP is equal to $4,500, aggregate expenditure is equal
to $ .
Part 2:
When real GDP is equal to $5,000, aggregate expenditure is equal
to $ .
Part 3:
When real GDP...

These equations represent the AE model of Country X and
correspond with Question #1
C = 0.75(DI) + 3000 I = 3000
G = 2000
X = 2000
M = 1000 T = 4000 DI = Y – T
C = consumption expenditure, DI = disposable income I =
autonomous investment
G = government expenditure
X = exports
M = imports
T = tax revenues Y = real GDP
1. What is the value of the government expenditure multiplier in...

The MPC for a closed economy is 0.75. Autonomous
consumption is $500, investment is $300, and government spending is
$400.
a) What is the equilibrium
level of real GDP?
b) If business increases
planned investment expenditure by 300 to 400, what is the new
equilibrium real GDP?
c) What is the slope of the AE
function in this economy and the value of the
multiplier?

The
components of planned aggregate spending in a certain economy are
given by Consumption Function: C = 800 + 0.75(Y - T) – 2000r
Planned Investment: I p = 400–3000r Government Revenue and
Spending: T = 300 and G = 450 Net Export: NX = 75 where r is the
real interest rate (For example, r = 0.01 means that the real
interest rate is 1 percent). (1) Find the level of public saving.
(2) Suppose that the real interest...

If the slope of the consumption function is 0.8, and there is no
income tax or imports, what is the multiplier?
Select one:
a. 0.80
b. 1.25
c. 0.56
d. 5
In the table below shows the aggregate expenditure schedule for
a simple economy. What is autonomous expenditure for this
economy?
Real GDP
Aggregate Expenditure
0
100
100
175
200
250
300
325
400
400
500
475

Honduras is a small open economy (an open economy is an economy
that trades with other countries). Suppose Honduras imposes a
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Group of answer choices:
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- planned expenditure curve (E);...

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