Question

Answer the Below Intermediate Macroeconomics Question.

1. You are given the following four-sector Keynesian income model.
   C = 120 + 0.75Yd
   I = 230
   T = 40 + 0.20Y
   G = 560
   M = 30 + 0.10Y
   X = 360
   H = 25
   Where C is consumption, Yd is disposable income, T is tax, I is autonomous investments, G is government expenditure, M is imports, X is exports and H is net capital outflows.

a. Calculate the equilibrium level of income.
b. Calculate the balance of trade and interpret the results.

c. Calculate the foreign trade multiplier and interpret the results.  

d. What is the new equilibrium level of income when government expenditure increases by 100.     
e. Using the results in parts (a) and (d), explain the effectiveness of fiscal policy.

Answer 1

a. EQUILIBRIUM LEVEL OF INCOME

Y=C+I+G

Y=120+0.75yd+230+560

Y=120+0.75(Y-40+0.20Y)+230+560 [yd=INCOME-TAX]

Y=120+0.75Y-30+0.15Y+230+560

Y=880+0.90Y

Y-0.90Y=880

0.10Y=880

Y=880/0.10

Y=8800

b.BALANCE OF TRADE(BOT)

BOT=COUNTRY EXPORTS-COUNTRY IMPORT

BOT=360-30+0.10Y

BOT=360-30+0.10(8800)

BOT=330+880

BOT=1210

d.New equilibrium level of income when government expenditure increases by 100.

Y=C+I+G

Y=120+0.75yd+230+660

Y=120+0.75(Y-40+0.20Y)+230+660 [yd=INCOME-TAX]

Y=120+0.75Y-30+0.15Y+230+660

Y=980+0.90Y

Y-0.90Y=980

0.10Y=980

Y=980/0.10

Y=9800

new equilibrium level of income is $9800

e.When government increases its spending, it stimulates aggregate demand, and causes some real GDP growth. That growth creates jobs, and more workers earn income. That new income sparks greater consumer spending, which drives aggregate demand even more, and causes additional real GDP growth.THESE FACTORS RESULTS IN INCREASED EQUILIBRIUM INCOME AS WE HAVE SEEN IN THIS CASE THE INCOME WHICH WAS CALCULATED DURING THE PREVIOUS GOVERNMENT SPENDINGS WAS LESS THAN WHICH IS NOW.

INCOME WHEN G=560 IS 8800

INCOME WHEN G=660(INCREASED BY 100) IS 9800.

THE INCOME INCREASED BY 1000 WHEN THE GOVERNMENT SPENDINGS INCREASED BY 100