Question

The macroeconomy of the TELLA is represented by the following model.

Goods Market

Y=C+I+G+X-M

C=200+0.7(T-T)

T=0.2YI=100-10r

G=150

EX=200

IM=0.1Y

Money Market

Md=1000-6666r

Ms = [(C/D+1)/(C/D+R/D)]H

Where C/D=0.2; R/D=0.2 and H=200

Use this model to answer the following questions:

1) The value of the money multiplier in this model is:

A) 2.0

B) 2.5

C) 3.0

D) 3.5

E) 4.0

2) The value of the expenditure multiplier in this model is:

A)1.54

B)4.23

C)2.51

D)1.85

E) 3.50

3) The value of autonomous

expenditure in this model is:

A) Not determinable.

B) 549.4 billion $

C) 599.4 billion $

D) 649.4 billion $

E)  699.4 billion $

4) The value of GDP in this economy is:

A) 1203 billion $

B)  650 billion dollars

C) 1503 billion dollars

D) 950 billion dollars

E) 1703 billion dollars

5) The value of the export balance and the government budget balance is:

A) a trade surplus of 80 billion $ and a budget surplus of 90.6 billion $

B) a trade deficit of 80 billion $ and a budget surplus

of 90.6 billion $

C) a trade deficit of 80 billion $ and a budget deficit of 90.6 billion $

D) a trade surplus of 80 billion $ and a budget deficit of 90.6 billion $

E) It is not possible to calculate these figures from the information provided.

Answer 1

1. Calculation of Money Multiplier.

Money Multiplier = Money Supply / Monetary Base

In the Question Money Suppy = Ms, And Monetary Base = H = 200. so,

Ms = Money Multiplier * 200

We can see formula:

Ms = (C/D+1)/(C/D+R/D) * H which can be eloaborated as Money supply = Multiplier * Monetary Base

or, Money Multiplier = (C/D+1)/(C/D+R/D), Putting values as per Question,  C/D = 0.2, R/D = 0.2.

So, Money Multiplier = ( 0.2 + 1 ) / ( 0.2 + 0.2 ) = 1.2 / 0.4 = 3.

Money Multiplier = 3.

Correct Answer OPTION (C) : 3.0

2. Calculation of expenditure multiplier.

National Income Identity is given by formula:

Y = C + I + G + EX - IM

Where, C

C = 200 + 0.7 (Y - T) ; T=0.2Y ; I = 100 - 10r ; G=150 ; EX=200 ; IM = 0.1Y.

Arranging the above equations:

C=200+0.7 (Y - T) = 200+0.7 (Y - 0.2 Y) = 200 + 0.7 (Y - 0.2 Y) =  200 + 0.7 * 0.8 Y = 200 + 0.56 Y

Now,

Y = C + I + G + EX - IM = 200 + 0.56 Y + 100 - 10r + 150 + 200 - 0.1Y = 650 - 10r + 0.46Y

Y = 650 - 10r + 0.46Y

0.54Y = ( 650 - 10r )

Y = (1 / 0.54 ) ( 650 -10r )

Y = 1.85 ( 650 -10r )

Here in the above Equation the value = 1.85 represents the Expenditure multiplier.

Expenditure Multiplier =  1.85

In principle, the above equation represents that a $ 100 increase in autonomous expenditure will increase the income by $185.

Correct Answer OPTION (D) : 1.85

3. Autonomous expenditure.

We will bring the equation that we calculated above here to find out the value of Autonomous Expenditure:

Y = 1.85 ( 650 -10r ),

We had obtained the value 1.85 as Multipler. The value represented by (650 - 10r) is the Autonoumous Expenditure. to calculate exact value we need to find the value of 'r' which is the rate of interest and is determined by equating money demand with money supply.

Md = 1000-6666r

Ms = [(C/D+1)/(C/D+R/D)] * H = 3 * 200 = 600 , [ as the (the value of Money Multiplier = 3 and Monetary Base(H) = 200. ]

Now Ms = Md,

600 = 1000 - 6666 r

or, - 400 = - 6666 r

or, r = 400 / 6666

or, r = 0.06.

Putting this value in our Autonomous Expenditure:

Autonomous Expenditure = 650 -10r = 650 - 10 * 0.06 = 650 - 0.6 = 649.4

Autonomous Expenditure = 649.4

Correct Answer OPTION (D) :649.4

4. Value of GDP in this economy;

GDP has been represented by the value Y in the equations till now. We know from above:

GDP = Expenditure Multiplier * Autonoums Expenditure = 1.85 * 649.4 = 1201.39. (This is approximately equal to the value 1203 mentioned in the question.)

The Value of GDP in the Economy = 1203 billion $.

Correct Answer OPTION (A) : 1203 billion $.

5. Value of the Export Balance and the Government Budget balance is:

Export Balance = Exports - Imports = EX - IM = 200 - 0.1Y

= 200 - 0.1 (1203) = 200 - 120.3 = 79.7

Government Budget Balance = Government Receipts - Government Expenditure = T - G

= 0.2Y - 150 = 0.2 (1203) - 150 = 240.6 - 150 = 90.6

Due to Positive figures in both the Kinds of balances, there will be a surplus in both the segments.

Correct Answer OPTION (A) : A trade surplus of 80 billion $ and a budget surplus of 90.6 billion $.