I am having a hard time trying to figure out how to start this one. If someone c

Question

I am having a hard time trying to figure out how to start this one. If someone could help with at least a,b,c I would appreciate it

Consider the following economy

C = Ca + 0.75 (Y – T) ;   Ca = 450 – 15r ; T = 200 + 0.25 Y; IP = 1800 – 35 r ; G = 1900;    NX = 800 – 0.0625 Y.

a) What are the values of the autonomous net export NXa and the autonomous taxes Ta (hint: see the formulas and compare)

b) Compute the multiplier

c) Derive the equation of the autonomous spending.

d) Derive the equation of the IS curve

e) Compute the values of the AP and YIS for r =3.25

f) Compute the values of the Ca, C, T, IP, and NX for income          Y = 20,000 and r = 3.25. Is this country a net importer or net exporter?

Explanation / Answer

(a) Autonomous net export = 800

Autonomous tax (Ta) = 200

(b) Marginal propensity to consume, MPC = 0.75

So, Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75)

= 1 / 0.25

= 4

(d)

Total autonomous spending = autonomous consumption + autonomous investment spending + autonomous government spending

= 450 + 1800 + 1900 = 4,150

(NOTE: I've assumed that autonomous component is independent of both Y and 'r')

(d)

IS curve equation is

Y = C + I + G + NX

Y = 450 - 15r + 0.75 (Y - 200 - 0.25Y) + 1800 - 35r + 1900 + 800 - 0.0625Y

Y = 450 - 15r + 0.75 (0.75Y - 200) + 1800 - 35r + 2700 - 0.0625Y

Y = 4,800 + 0.5Y - 50r

0.5Y = 4800 - 50r

Multiplying both sides by 2:

Y = 9600 - 100r ......... [Equation of IS curve]

(e) 3 = 3.25%

Then:

IP = 1800 - 35r = 1800 - (35 x 3.25)

= 1800 - 113.75

= 1686.25

Y = 9600 - 100r

= 9600 - (100 x 3.25)

= 9,275

(f) Y = 20,000 and 3 = 3.25

Ca = 450 - 15r = 450 - (15 x 3.25) = 401.25

C = Ca + 0.75 (Y - T) = 401.25 + 0.75 (Y - 200 - 0.25Y)

= 401.25 + 0.75 (0.75 x 20,000 - 200)

= 401.25 + 0.75 x 14,800

= 11,501.25

T = 200 + 0.25Y = 200 + 0.25 x 20,000 = 5,200

IP = 1800 - 35r = 1800 - (35 x 3.25) = 1800 - 113.75

= 1686.25

NX = 800 - 0.0625Y = 800 - 0.0625 x 20,000 = - 450

Since NX < 0, country is a net importer.

NOTE: Even though you asked for the 1st 3 parts, I've answered all.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.