Problem

1. The following data refer to a hypothetical economy: Consumption = 100 + 0.8Yd Investment = 150 Government = 200 Exports = 200 Taxation = 02Y Imports --- 0.05 Yd where Y is the level of national income.

(a) Find the equilibrium level of national income, using both the aggregate-demand and injection-leakages approaches. Illustrate your answer with the appropriate graphs.

(b) Is there a budget surplus or budget deficit at the equilibrium level of income?

(c) Is the balance of trade in deficit or surplus at the equilibrium level of in-come?

(d) What is the value of the multiplier in this economy?

(e) If exports increase to 250, what is the new equilibrium level of income? (f) In the original situation, if the government introduced transfer payments by 200, what is the new equilibrium level of income?

2. Why is the balanced budget multiplier equal to 1?