SECTION A (1)Consider the following macroeconomic model of Byland = c + 1 +G + X
ID: 1129955 • Letter: S
Question
SECTION A (1)Consider the following macroeconomic model of Byland = c + 1 +G + Xn C 220+0.63Y. Income identity ...Consumption function 1000-2000R R..I.nvestment function overnment spending = Go NX = 575-0.10Y-500R Net export function M = (0.1583Y-1000R) P . (a)Explain why next export is negatively related to interest rate in the net export function. (b)For this economy, find the expression for aggregate real output/income and explain why it is an aggregate demand curve. (c)Find the values of equilibrium real output (Y) and interest rate(R) given that the price level is unity, government spending is 1200 and the money supply by the Central Bank is 900. (d) Find the amount of consumption spending, investment spending and net export. Comment on the state of Byland's trade relations with the rest of the worldExplanation / Answer
(a) The net exports of an economy are negatively related to interest rates in the net export function. Higher the interest rates mean that the investors want to buy more of the domestic currency and recieve a relatively higher interest rate. This means that they receive more interest relatively with the increase in the interest rates. With the increase in demand of currency, the domestic prices go up. Therefore, the net exports (exports minus imports) will decrease with the increase in the interest rates. Hence, the net exports and interest rates are inversely proportional.
(b) Aggregate Output of an economy is the total amount of the output produced and supplied in the economy. Aggregate Income is the total amount of income which is received by all factors of production in an economy. The two of them are always equal at any period of time, so we can refer to both of them as aggregate income, and use the symbol Y for that
Y = C+I+G+Xn
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