Question

An open economy is described by the following system of macroeconomic equations, in which all macroeconomic aggregate are measured in billions of Namibian dollars, N$:

Y = C + I + G + X – M

C = 10 + 0.8 Y_d

T = 10+ 0.2Y

X = 80

I = 35

G = 15

TR = 10 – 0.05Y

M = 22 + 0.1Y

Where:                                 Y is domestic income

                                                Y_d is private disposable income

                                                C is aggregate consumption spending

                                                T is government tax revenue

                                                I is investment spending

                                                X represents exports

                                                M represents imports of goods and services

                                                Y_f is income at full employment

(a) Determine the equilibrium level of income/ output

(b) Illustrate the aggregate spending curve and equilibrium level of income on a diagram

(c) Determine the surplus/ deficit in the government budget at equilibrium.

(d) Determine trade balance at equilibrium

(e) Determine by how much government spending has to increase in order to achieve full employment (Y_f =300). How does this change affect the budget balance, and trade balance?

Answer 1