(a) Assume the following equations ( in millions of dollars) describe an hypothe

Question

(a) Assume the following equations ( in millions of dollars) describe an hypothetical economy where both the price level and interest rates are fixed.

C = 100 + 0.8 (YD)

YD = Y - NT

N T = 60

I = 80

G = 60

X = 50

M = 17 + 0.05Y

(i) What is the equilibrium level of income (real GDP) in this economy.

(ii) Calculate the value of the autonomous expenditure multiplier.

(iii) Due to a recession in the world economy exports from this economy falls by $10 million to a total of $40 million. What is the new equilibrium income in this economy?

(iv) Fearing a recession arising from the decline in exports as stated in (iii), the government of this economy plans to provide tax cuts to its citizen. What would be the size of the tax cut required compensating for the fall in income? What would be the size of the budget deficit after the cut in taxes?

Explanation / Answer

GDP = C + I + G + (X

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