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1: The following equations describe a small economy. Figures (except parameters) are in $m. C = Co + cYD (Private consumption) YD = Y +

1: The following equations describe a small economy. Figures (except parameters) are in $m. C = Co + cYD (Private consumption) YD = Y + TR - T (Private disposable income) T = To + tY (Total taxes) G = Go, TR = TRo (Gov. expenditure and transfer payments, respectively) I = Io (Private investment) X = Xo+zY (Total exports) IM = IMo + mY (Total imports) Y = C + I + G + X - M (Equilibrium condition) List of variables Endogenous Variables: C, YD, T, IM, I and Y Exogenous Variables: Co = 300, To = 80, Io = 250, Go = 250, TRo= 150, Xo = 220, IMo = 120 Parameters: c = 0.80, t = 0.15, z = 0.10, m = 0.16 Policy variables: Fiscal policy: (G, t and TR), Monetary policy: (N/A) Using this model, answer the following (i) Determine the equilibrium value of GDP (ii) Explain the financing of total investment in this economy (iii) Complete the National Accounting Matrix (Draw in your answer books) (iv) Suppose the IS was Y = 4000-250i and LM was Y = 1000+50i, find i* and Y* using Cramer's rule. (v) Explain three deviations between AD-AS and IS-LM models.

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