Question

. Suppose an economy is represented by the following equations. Consumption function C = 200 +...

. 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 :) (:

Homework Answers

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.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
. Suppose an economy is represented by the following equations. Consumption function                            &nb
. 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...
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...
1. Suppose the United States economy is represented by the following equations: Z= C + I...
1. Suppose the United States economy is represented by the following equations: Z= C + I + G , C = 500 + 0.5Yd, Yd = Y − T T = 600, I = 300, G = 2000, Where, Z is demand for goods and services, 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...
Consider an open economy. Let e denote the real exchange rate and Y denote income. Suppose...
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...
These equations represent the AE model of Country X and correspond with Question #1 C =...
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...
In an economy with no exports and​ imports, autonomous consumption is ​$2 ​trillion, the marginal propensity...
In an economy with no exports and​ imports, autonomous consumption is ​$2 ​trillion, the marginal propensity to consume is 0.6​, investment is ​$5 ​trillion, and government expenditure on goods and services is ​$6 trillion. Taxes are ​$4 trillion and do not vary with real GDP. If real GDP is ​$33.1, calculate disposable​ income, consumption​ expenditure, and aggregate planned expenditure. What is equilibrium​ expenditure? The author got the equilibrium expenditure is ​$26.5 trillion but the expert got 25. Please break down...
Suppose the following aggregate expenditure model describes the US economy: C = 1 + (8/9)Yd T...
Suppose the following aggregate expenditure model describes the US economy: C = 1 + (8/9)Yd T = (1/4)Y I = 2 G = 4 X = 3 IM = (1/3)Y where C is consumption, Yd is disposable income, T is taxes, Y is national income, I is investment, G is government spending, X is exports, and IM is imports, all in trillions $US. (a) Derive a numerical expression for aggregate expenditure (AE) as a function of Y. Calculate the equilibrium...
Recall that in an open economy Y = C + I + G + NX, where...
Recall that in an open economy Y = C + I + G + NX, where                             Net Exports NX = EX - IM.      Suppose a country's exports EX are independent of (unrelated to) its national income Y, but its       imports IM tend to increase whenever Y increases. a. Briefly explain why imports might behave in this manner.       b. Given these assumptions draw each of the following curves as a function of Y            on a separate...
AE = C + I + G + (X-M) C – Consumption I – Investment G...
AE = C + I + G + (X-M) C – Consumption I – Investment G – Government Spending X – Exports M – Imports AE = Y Y = Income/Output C = Autonomous Consumption (a) + Marginal Propensity to Consume (MPC)*Y             i. Autonomous Consumption (a) – Consumption from Wealth (Past Savings)             *Autonomous Consumption can also be affected by Expectations, Household Debt, and Taxes.     ii. Marginal Propensity to Consume (MPC) – The percentage of every new dollar of...
The components of planned aggregate spending in a certain economy are given by Consumption Function: C...
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...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT