ECMA06_Tutorial_4_Solution

ECMA06_Tutorial_4_Solution - ECMA06 Tutorial #4 Answer Key...

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I = 50 – 5(0.05 – 0.05) = 50 X = 220 – 3(0.85 – 0.85) = 220 IM = (3/11)Y + 2.5(0.85 – 0.85) = (3/11)Y Question 1 Disposable income, DI: DI = Y – T + TR DI = Y – (44 + 0.3Y) + (110 – 0.1Y) = 0.6Y + 66 C = C(Y): C = 10 + (10/11)(0.6Y + 66) C = 70 + (6/11)Y The AE function: AE = C + I + G + X – IM AE = [70 + (6/11)Y] + 50 + 300 + 220 – (3/11)Y AE = 640 + (3/11)Y Equilibrium output: In equilibrium, Y = AE: Y = 640 + (3/11)Y (8/11)Y = 640 Y* = 880 Question 2 Suppose government spending increases by 40 to 340, i.e., G = 340: The new AE function: AE = C + I + G + X – IM AE = [70 + (6/11)Y] + 50 + 340 + 220 – (3/11)Y AE = 680 + (3/11)Y New equilibrium output: In equilibrium, Y = AE: Y = 680 + (3/11)Y Y* = 935 G = 300 G = 340 Change Equilibrium output, Y* 880 935 935 – 880 = 55 GBB = T – TR – G – 14 – 32 – 32 – (– 14) = – 18 Trade balance = X – IM – 20 – 35 – 35 – (– 20) = – 15 When government spending increases by 40, the government budget deficit increases by 18 (GBB falls by 18). In addition, the country’s trade deficit also widens when government spending rises. Indeed, the simultaneous occurrences of budget and trade deficits are called the

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This note was uploaded on 12/21/2011 for the course ECONOMICS ECMA06 taught by Professor Dr.atamazaheri during the Spring '10 term at University of Toronto- Toronto.

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ECMA06_Tutorial_4_Solution - ECMA06 Tutorial #4 Answer Key...

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