Question

Consider the following Keynesian income model: E = C + I + G + X-M C = 215 + 0.82Yd Yd = Y – T T = 60 + 0.33Y I = 400 G = 620 X = 310 M = 50 + 0.20Y In equilibrium, Y = E: a. calculate the equilibrium level of income. b. calculate the amount of taxes collected when the economy is at equilibrium level of income and show whether the government budget is in surplus or deficit. c. calculate the value of net exports when the economy is at equilibrium level of income.

Answer 1

(a)

In equilibrium,

Y = E

Y = C + I + G + X-M

Y = 215 + 0.82Yd + 400 + 620 + 310 - (50 + 0.20Y)

Y = 215 + 0.82(60 + 0.33Y) + 400 + 620 + 310 - 50 - 0.20Y

Y = 215 + 49.2 + 0.27Y + 400 + 620 + 310 - 50 - 0.20Y

Y = 1,544.2 + 0.07Y

Y - 0.07Y = 1,544.2

0.93Y = 1,544.2

Y = 1660.43

The equilibrium level of income is 1,660.43

(b)

Calculate the amount of taxes collected when the economy is at equilibrium level of income -

T = 60 + 0.33Y = 60 + (0.33 * 1660.43) = 60 + 547.94 = 607.94

The amount of taxes collected when the economy is at equilibrium level of income is 607.94

T = 607.94

G = 620

When G > T, government budget is in deficit.

In given case, G > T.

So, government budget is in deficit.

Deficit = G - T = 620 - 607.94 = 12.06

The government budget deficit is 12.06

(c)

Calculate the value of net exports when the economy is at equilibrium level of income -

Net exports = X - M

Net exports = 310 - (50 + 0.20Y) = 310 - [50 + (0.20 * 1,660.43)] = 310 - [50 + 332.08] = 310 - 382.08 = -72.08

The value of net exports when the economy is at equilibrium level of income is -72.08