Question

Assume: c = 40 + 0.8(y - t) g = 10 i = 20 t = 0, where t are taxes. (a) calculate y at equilibrium. (b) calculate c, i, and g at equilibrium. (c) now assume, ex = 5 + 4ep/p im = 10 + 0.1 (y - t) - 3ep/p e = 3 p = 1.5 p = 2

Answer 1

(a). To calculate Y at equilibrium

Y = C + I + G

Y = 40 + 0.8(Y – 0 + 10 + 20)

Y = 350

(b). To calculate C, I and G at Equilibrium

C = 40 + 0.8 Y

Since Y = 350

C = 40 + 0.8(350)

C = 40 + 280

C = 320

I = 20

G = 10

(c).To find equilibrium Y

Given,

EX = 4 + 3EP/P

IM = 8 + 0.1 (Y - T) - 2EP/P

E = 3

P = 1

P = 1.5

Y = 170