Question

1. Consider the following economy. Suppose the real exchange rate is fixed and equal to one. The consumption (C), investment (I), government spending (G), taxes (T), exports (X), and imports (Q) are given by:

Z = C + I + G + (X – Q)

C = 120 + 0.85(Y– T)

I = 250

G = 600

X = 0.2Y*

T = 50 + 0.25Y

Q = 30 + 0.1Y

where Y is the domestic income and Y* is the income of the principal trading partner. Assume Y* = 800.

1. Based on the above information, derive the planned aggregate expenditure as a function of Y (Hint: derive the ZZ curve – aka the AE curve). Sketch the Keynesian cross diagram of the above economy and indicate the equilibrium level of income (output).                                                                         
   
2. Calculate the equilibrium level of income.   
   
3. Calculate the amount of taxes collected when the economy is at equilibrium level of output. Is the government running a surplus or deficit, and by how much?                      
   
   

d.Calculate the value of net exports when the economy is at equilibrium level of output.                                                                                        

Answer 1