Question

The data of the open economy of Lowland is given below. All values are in Smillions. Use the information given below and your knowledge to answer the questions that follows. Consumption: C = 30+ 0.6 YD Disposable income: YD-Y-NT Government's net tax: NT - 4 +0.2Y Planned investment: I = 40 Government's expenditure: G-20 Export: X-50 Import: 10+ 0.05Y Using the information given above calculate the following: (a) Marginal propensity to save? (b) Equilibrium level of income. (c) Value for consumption by using the equilibrium level of income calculated in (b) above. (d) Government's expenditure multiplier. (e) Recessionary gap or an inflationary gap that is created when the full employment level of potential GDP is $200 million.

Answer 1

C = 30 +0.691 a MPC =0.6. MPS = 1 - MPC = 1-0.6 =0.4 du Equilibrium Y = C+I+G+X - M Y= 30+0.6(y-W) +40+pots0 - [10 to.osy y = 140 to.Gly - (uto.2y)7 -10 -0.sy y = 130 +0.67 -2.4 -0.27 -0.osy y = 127,60 +6.43y Y - 0.43y =127.60 0.S7Y=127.60 Y = 127.60 0.57 Y = 223.85 © C= 30 +0.6 [y - (U-0.2y)] = 30 +0.6 [223.85 - (U-0.2 (223.857 = 30 toit [223.85 - (u-40.77] = 30 +0.6 [223.65 - (-40.77)]

C = 30+ 0.6 [223.85 + yo. 777 = 30 + 0.6 (264:62) = 30 + 158.772 = 188.772 (d) hevt spending multiplier =/ ups 0.4 = 2.5