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.

thanks youu :) (:

Answer #1

At equilibrium,

Y = AE

or, Y = C + I + G + (EX - IM)

or, Y = 200 + 0.8Yd + 400 +600 + (200 - 0.1Yd)

or, Y = 1400 + 0.7Yd

or, Y = 1400 + 0.7(Y - T)

or, Y = 1400 + 0.7(Y - 500 -0.2Y)

or, Y = 1400 + 0.7(1 - 0.2)Y - 350

or, Y = 1050 +0.56Y

or, 0.44Y = 1050

or, Y = 2386.36

Hence, the equilibrium level of income is 2386.36 unit (rounded to 2 decimal places).

Fiscal policy becomes less effective in open economy. In an open economy expansionary fiscal policy leads to increase in interest rate and appreciate the currency. So, the export demand falls. on the other hand, it increases the import demand. So, trade deficit increases. As a result aggregate demand falls. Hence, the effectiveness of expansionary fiscal policy is less for open economy.

. 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...

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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
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