University:
Adelphi University
Course:
EECA 101 | Introduction to Economics
Academic year:

2021
Views:

264

Pages:

2
Author:

drolowpzco

Question 1 Suppose that an economy is in equilibrium at Y-C+I+G+G+(X-M) where, C=50-b(Y-50tY+GT); I=100, G=50 Gt=25 (Transfer payment); X=10 M=5+0.1Y; b=0.8; and t=0.25 1) Find the national income at equilibrium 2) Find the foreign trade multiplier 3) How much additional government expenditure will be required to increase the equilibrium level of national income by 50? 4) At equilibrium, does the economy have a trade deficit or trade surplus, and by how much? 19:55 : L Find the national income at equilibriun 13 Marks) Find foreign trade multiplier. (2 Marks) national income by 507 How much additional government expenditure will bit required to increase the equilibrum level of Marks At equilibrium, does the economy have trade deficit orde Answer To answer these questions, we first need to understand the components of the given economic model and the relationship between them. Equilibrium in economics refers to a state where all forces are balanced and there is no tendency for change. In this model, the national income (Y) is equal to consumption (C), investment (I), government spending (G), and net exports (X-M). 1) To find the national income at equilibrium, we need to solve the equation Y = C+I+G+X-M. Substituting the given values, we get: Y = [50-b(Y-50-tY+GT)] + 100 + 50 + (10-5-0.1Y) Simplifying the equation, we get: Y = 205 - 0.8Y + 0.2tY + 0.8GT Rearranging the terms, we get: Y + 0.8Y = 205 + 0.2Yt + 0.8GT 1.8Y = 205 + 0.2(0.25)Y + 0.8(25) 1.8Y = 212.5 + 0.05Y + 20 1.75Y = 232.5 Therefore, the national income at equilibrium is Y = 133.33 2) The foreign trade multiplier measures the impact of changes in net exports on the overall national income. It is calculated as the change in national income divided by the change in net exports. In this model, the foreign trade multiplier can be calculated as: Foreign Trade Multiplier = Change in Y/Change in (X-M) Substituting the given values, Foreign Trade Multiplier = (0.1Y + 5)/ (X-M) = (0.1Y + 5)/ (10-5-0.1Y) = (0.1Y + 5)/ (5-0.1Y) = 1/0.4 = 2.5 3) To increase the equilibrium level of national income by 50, we need to increase government spending (G) by an amount equal to the multiplier effect. Therefore, additional government expenditure required = Multiplier * Change in Government Spending = 2.5 * 50 = 125 Therefore, an additional government expenditure of 125 will increase the equilibrium level of national income by 50. 4) At equilibrium, the economy has a trade deficit. This can be determined by looking at the net export equation, M-X, which is (5+0.1Y)-(10-0.1Y). Here, we can see that M (imports) is greater than X (exports) and therefore, there is a trade deficit of 5-0.1Y. Substituting the equilibrium national income (Y = 133.33) we get a trade deficit of 50.1(133.33) = -6.67. This means that at equilibrium, the economy has a trade deficit of $6.67 billion.