Question

Consider an open economy that is described by the following model: C=150+0.45Y Where:

Y= income
C= consumption
I=350
I= investment
G=400
G= government spending
T=0.20YT= taxes
X=200X= exports
M=180M= autonomous imports
Yf=2800
Yf= full employment income level
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Note to student: show all your workings. Figures are in millions.
Calculate the multiplier.

Answer 1

To find the equilibrium for this open economy, we need to calculate the aggregate expenditure (AE) and use the multiplier. The aggregate expenditure function is AE = C + I + G + X - M, and the multiplier formula is Multiplier = 1 / (1 - (MPC + MPI + MPT)).

Step-by-step explanation:

To find the equilibrium for this economy, we need to calculate aggregate expenditure (AE). Using the given values: C = Consumption = 400 + 0.85(Y - T), I = 300, G = 200, X = 500, and M = 0.1(Y - T), we can substitute these values into the aggregate expenditure function: AE = C + I + G + X - M

Once we have the equilibrium level of output (Y), we can calculate the multiplier by using the formula: Multiplier = 1 / (1 - (MPC + MPI + MPT)). MPC is the marginal propensity to consume, MPI is the marginal propensity to invest, and MPT is the marginal propensity to tax. In this case, the given values make the calculations easier. The MPC is 0.85 and the MPI and MPT are both 0, so the Multiplier is 9.52.