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Section+Exercise+16+solns - 2011 Berkeley Doraiswamy Spring...

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Department of Economics            Spring  2011 University of California          Economics 1 Berkeley    Head GSI: Swetha  Doraiswamy Section Exercise 16 For 3/31/11 & 4/4/11 1. Suppose the following equations describe a simple economy. All amounts are $bn per year. Consumption: C = 100 + 0.75Y d Investment: I = 150 Government: G = 200 Exports: EX = 150 Imports: IM = 200 Transfer Payments: TR = 150  Tax Payments: TA = 350 a. Describe the components of aggregate expenditure.  How are they defined?  What is the  equation used to define aggregate expenditure? The components of aggregate expenditure are consumption (C), investment (I),  government spending (G), gross exports (EX), and imports (IM). Consumption is spending  by households; investment is spending by businesses on new buildings, machinery, and  changes in inventories; government spending is purchases of goods and services by  government agencies; gross exports is purchases by foreign residents of domestically- produced goods and services; and imports is purchases of foreign goods and services by  domestic residents. The equation to calculate aggregate expenditure is AE = C + I + G + EX – IM. b. What is the equation for net exports? Calculate using the numbers above.
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