Given the following variables in the open economy aggregate expenditure model, a

Question

Given the following variables in the open economy aggregate expenditure model, autonomous consumption (C o) = 200, autonomous investment (I o) = 200, government spending (G o) = 100, export spending (X o) = 100, autonomous import spending (M o) = 100 taxes (Tp) = 0, marginal propensity to consume (c1) = 0.8 marginal propensity to invest (i1) = 0.1, and marginal propensity to import (m1) = 0.15,

a. Calculate that equilibrium level of income for the open economy aggregate expenditure model.

b. If there is an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, calculate the new equilibrium level of income and the value of the multiplier.

c. Compare with the original equilibrium in part a, if the government decides to impose taxes (Tp) of 100, calculate the new equilibrium level of income.

d. Hint: Remember that consumption has an autonomous component and is a function of disposable income, Yd where Yd = Y - Tp

Explanation / Answer

a) Y=C+I+G+X-M Y=200 + 0.8*Y + 200 + 0.1*Y + 100 + 100 - 100 - 0.15*Y on calculating Y=2000 b) autonomous import expenditure increase from 100 to 200 then Y=200 + 0.8*Y + 200 + 0.1*Y + 100 + 100 - 200 - 0.15*Y Y=1600 c) Y=200 + 0.8*(Y-T) + 200 + 0.1*Y + 100 + 100 - 100 - 0.15*Y 0.25Y=500-80 Y=1680

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