ECMA06_Tutorial_5_Solution - ECMA06 Tutorial#5 Answer Key...

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ECMA06 Tutorial #5 Answer Key If r is held fixed at 0.06 & E is held fixed at 0.85 US$ per C$, then I = 40 – 4.5(0.06 – 0.06) = 40 X = 180 – 2(0.85 – 0.85) = 180 IM = (1/4)Y + 2(0.85 – 0.85) = (1/4)Y Part (a) Disposable income, DI: DI = Y – T + TR DI = Y – (5/11)Y + [120 – (1/11)Y] = 120 + (5/11)Y C = C(Y): C = 10 + (11/12)[120 + (5/11)Y] C = 120 + (5/12)Y The AE function: AE = C + I + G + X – IM AE = [120 + (5/12)Y] + 40 + 320 + 180 – (1/4)Y AE = 660 + (1/6)Y Equilibrium output: In equilibrium, Y = AE: Y = 660 + (1/6)Y Y* = 792 Government (budget) deficit: GBB = T – TR – G GBB = (5/11)Y – [120 – (1/11)Y] – 320 = (6/11)Y – 440 GBB = (6/11)(792) – 440 = – 8 The government runs a budget deficit of 8. Part (b) Suppose government spending increases by 55, i.e., G = 375: The new AE function: AE = [120 + (5/12)Y] + 40 + 375 + 180 – (1/4)Y AE = 715 + (1/6)Y New equilibrium output: In equilibrium, Y = AE: Y = 715 + (1/6)Y Y* = 858 Government (budget) deficit: GBB = (5/11)Y – [120 – (1/11)Y] – 375 GBB = – 27 The government budget deficit increases by 19 to 27. The (government expenditure) multiplier: dG * dY = ΔG * ΔY = 55 792 - 858 = 1.2 Part (c) In part (b), we showed that an increase in G by 55 will increase (autonomous) AE by 55.
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