Question Explain how the response of y to the change in ?? ̅̅̅̅ depends on the...

Question Explain how the response of y to the change in ?? ̅̅̅̅ depends on the magnitude of ?? ` . Make sure to provide your answer with the relevant graphs, mathematical equations, and economic interpretation.

Expert Solution

Income 'Y' is the total value of goods & services, produced & demanded in an economy, during a period of time. So, Y is identical to Aggregate Demand & Aggregate supply (at macro economic equilibrium). AD is total demand by all sectors of economy : households, firms, government, rest of world - ie Consumption, Investment, Government expenditure, Net Exports (exports - imports)

Y = C + I + G + NX (X - M) ;

where C, M are directly related to Y. I is inversely related to interest rate. G, X are exogeneously fixed.

So, Y = C (y) + I (i) + G + NX (y)

The growth rate of income (or output) = ??. It effects the import demand ie 'M' component of net exports 'NX'. Increase in growth ?? increases imports M, & vice versa. This would reduce net exports NX. Decrease in net exports NX : reduces AD, (shifts AD curve downwards), decreases income Y.

Rahul Sunny answered 2 years ago

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