After exhaustive research, econometricians have determined that the structure of

Question

After exhaustive research, econometricians have determined that the structure of the economy is:

C = 500 + 0.6DI

DI = Y – T

Y = C + I + G + (X – IM)

Survey data and government plans lead them to project the following values for the exogenous variables of their model:

    2009   2010   2011

G   1200   1300   1400

I   1400   1500   1350

T   1000   1200   1400

X – IM   –200   –100   0

a)     What level of GDP will the econometricians project for 2009, 2010, and 2011?

b)     What is the projected rate of growth of GDP in 2009–2010 and 2010–2011?

c)     What factors are responsible for the change in the projected growth rate?

Explanation / Answer

a)

2009

GDP,Y=C + I + G + (X – IM)

= 500 + 0.6DI +1400+1200-200

=500+0.6(Y-1000) +2400

Y= 2900 +0.6Y -600

0.4Y= 2300

Y2009=2300/0.4 =5750

2010

Y= 500+0.6DI+1500+1300-100

Y= 500+ 0.6 (Y-1200)+2700

Y=3200 +0.6Y-720

0.4Y=2480

Y2010=2480/0.4=6200

2011

Y=500+0.6DI+1350+1400+0

=500+0.6(Y-1400) + 2750

=3250+0.6Y -840

0.4Y =2410

Y2011=2410/0.4=6025

B)

Y2009 =5750

Y2010=6200

Rate of growthin 2009-10=( change in GDP/ old GDP)*100

                       =(450/5750)*100=7.83

Y2010=6200

Y2011=6025

Rate of growthin 20010-11=( change in GDP/ old GDP)*100

                                         =(-175/6200)*100= -2.82

c) major factors that are responsible for the change in the projected growth rate:

decrease in investment

increase in taxes

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