You were hired by the World Bank to look at the economy of a developing country

Question

You were hired by the World Bank to look at the economy of a developing country in the Middle East. The following set of equations describes this economy. C = 100 +0.75(7-T) I =100-5r G = 200 T = 180 X_n=-10 r = 2 Evaluate the multiplier in this economy. Calculate the equilibrium output in this economy. If you get to know that the full-employment level of output (Y_F) is 1100. How can you describe the economic situation in this country? Use the AS-AD model to describe the situation in this economy indicating recessionary or inflationary' gap if any exists. Calculate the government deficit as a percentage of GDP. Comment on this figure indicating the importance of relating the government deficit to GDP. If the policymaker wants the government deficit as a percentage of GDP to remain constant at its current level, design, with numbers, a fiscal policy that brings back the economy to YF. Use the AS-AD model to simulate the effect of such fiscal policy of the economy. Does the above policy have a supply-side effect? Does it work in favor or opposite to the | original policy? Use a graph to illustrate your answer. The demand function of money was estimated to be as follows: M_D = 0.75Y - 10r Determine the two components of the demand for money in the above equation Obtain the supply of money using output calculated in 1.b above. Use a graph to represent the money market equilibrium. Explain in sequence with the aid of graphs, how can monetary' policy be used to bring the economy back to (YF). What is likely the effect of the above policy on net export? Does this effect work to weaken or strengthen the original monetary policy?

Explanation / Answer

a) Multiplier = 1 / (1-MPC) => 1 / (1-0.75) => 4

b) Y = C + I + G + Xn

Y = 100 + 0.75 (Y - 180) + (100-5x2) + 200 - 10

= 100 + 0.75Y - 135 + 100 - 10 + 200 - 10

Y - 0.75Y = 245

Y = 980

d) Governemnt deficit = Tax Revenue - Government Expenditure

= 180 - 200 = -20

Deficit as %age of GDP = 2%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

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