Introductory Macroeconomics

Book: Introductory Macroeconomics

Chapter: 6. Open Economy Macroeconomics

Subject: Social Science - Class 12th

Q. No. 13 of Exercises

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13

Suppose C = 40 + 0.8Y D, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y (a) Find equilibrium income. (b) Find the net export balance at equilibrium income (c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 and 50?

Given


C = 40 + 0.8YD


T = 50


I = 60


G = 40


X = 90


M = 50 + 0.05Y


Equilibrium Income (Y) = A / 1 – c + m


A = C – cT + I + G + X - M


Y = C – cT + I + G + X - M/1 – c + m


= 40 – (0.8 x 50) + 60 + 40 + 90 - 50 / 1 – 0.8 + 0.05


= 560


Net exports at equilibrium income


NX = X - M – mY


= 90 – 50 – (0.05 x 560)


= 12


When G increase from 40 to 50, Equilibrium income (Y)


Y = C – cT + I + G + X - M/1 – c + m


= 40 – (0.8 x 50) + 60 + 50 + 90 - 50 / 1 – 0.8 + 0.05


= 600


Net export balance at equilibrium income


NX = X - (M + mY)


= 90-50-0.05x600


= 10


13

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