3BQuestion 2 (20 marks)

Consider an open economy that is described by the following model:

C = 350 + 0.65Y

M = 150 + 0.4Y

Where:

C = Consumption Y = Income

I = 200 I = Investment

G = 400 G = Government spending

T = 0.20 t = Tax rate

X = 380 X = Exports

M = Imports

Yf = 1 500 Yf = Full employment income level

2.1 Calculate the multiplier. (3)

2.2 Calculate the total autonomous spending. (2)

2.3 Calculate the equilibrium income. (3)

2.4 Calculate the value of the imports at equilibrium. (3)

2.5 Calculate the value of the net exports, and explain whether the country is a net exporter or a net importer. (5)

2.6 Calculate the change in government spending required to reach a full employment level of income.

Note to student: show all your workings. Round off your final answers to two decimal places.