Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.

Given –

C = 100 + 0.75YD

c = 0.75

I = 500,

G = 750

T = 0.20Y

M = 100 + 0.2Y

m = 0.2

X = 150

Equilibrium Income (Y) = C + c (Y - T) + I + G + X - M – mY

Y = 100 + 0.75 (Y – 0.20Y) + 500 + 750 + 150 – 100 – 0.2Y

Y = 1400 + 0.75 (0.8Y) – 0.2 Y

Y = 1400 + 0.6Y – 0.2Y

Y = 1400 + 0.4Y

0.6 Y = 1400

Y = 1400/0.6 = 2333

Govt Expenditure = 750

Govt Receipts (Tax) = 2333 X 20% = 467

Govt Expenditure > Govt Receipts

It shows the government is running budget deficit.

NX = X - M – MY

= =150 - 100 - 0.2 x 2333

= 150 - 100 - 467

= 150 - 567

= - 417

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