Question
(1) Consumption function: C=100+.8Y (2) Planned investment: I = 38 (3) Government spending: G=75 (4) Exports: EX=25 (5) Imports:IM= .05 Y (6) Disposable income: Y
(1) Consumption function: C=100+.8Y (2) Planned investment: I = 38 (3) Government spending: G=75 (4) Exports: EX=25 (5) Imports:IM= .05 Y (6) Disposable income: Y Y-T (7) Taxes: T=40 (8) Planned aggregate expenditure: AE=C+I+G+ EX-IM (9) Definition of equilibrium income: Y = AE a. What is equilibrium income in Hypothetica? What is the government deficit? What is the current account balance? b. If government spending is increased to G=80, what hap pens to equilibrium income? Explain using the government spending multiplier. What happens to imports? c. Now suppose the amount of imports is limited to IM-40 by a quota on imports. If government spending is again increased from 75 to 80, what happens to equilibrium income? Explain why the same increase in G has a bigger effect on income in the second case. What is it about the presence of imports that changes the value of the multiplier? d. If exports are fixed at EX=25, what must income be to ensure a current account balance of zero? (Hint: Imports depend on income, so what must income be for imports to be equal to exports?) By how much must we cut government spending to balance the current account? (Hint: Use your answer to the first part of this question to determine how much of a decrease in income is needed. Then use the multi plier to calculate the decrease in G needed reduce income by that amount.).
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started