Maurice Tutor

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Category > Economics Posted 21 Jul 2017 My Price 7.00

Hypothetica.

You are given the following model that describes the economy
of Hypothetica.
(1) Consumption function: C = 100 + .8Yd
(2) Planned investment: I = 38
(3) Government spending: G = 75
(4) Exports: EX = 25
(5) Imports: IM = .05 Yd
(6) Disposable income: Yd=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 happens
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 multiplier
to calculate the decrease in G needed to reduce income
by that amount.)

Answers

Maurice Tutor
(5)
Status NEW Posted 21 Jul 2017 09:07 PM My Price 7.00

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