Question

Suppose that the behavior of households and firms in an economy is determined by the following equations C=60+0.9Yd, II = 34, G = 25, T = 10+ 0.1Y, TR=80, X=30, IM=20 + 0.05Y

a. Calculate an expression for aggregate expenditure as a function of income (please enter your answer in the form: AE = a + bY). Note that in an open economy: AE=C+II + G + X - IM and pay attention to the parentheses!!
b. Calculate the equilibrium level of output (please just enter the numeric value of output).
c. Please calculate the level of taxes in the economy (please just enter the numeric value of taxes).
d. Is the government running a budget surplus or a budget deficit? Surplus . Please calculate its size.
e. Is the economy running a trade surplus or a trade deficit? Surplus . Please calculate its size.

Answer 1

Please find the detailed answer as follows:

Step-by-step explanation:

We use

a) AD = C + I + G + NX

AD = 60 + 0.9(Y – 10 – 0.1Y) + 34 + 25 + 30 – 20 – 0.05Y

AD = 120 + 0.76Y

b) Y* = 500

c) T = 60

d) budget surplus (T - G) = (60 - 25) = 35

e) Trade deficit = X - M = 30 - 45 = -15.