Determination of equilibrium income using aggregate expenditure model, AD- AS model.
Consider the following hypothetical economy.
This economy can be represented algebraically as:
Consumption: C = 100 + 0.75YD
Investment I = 200
Government Spending = 150
Net Taxes NT = 0.2Y
Exports X = 80
Imports M = 0.1Y
Disposable Income YD = Y-NT = Y - tY
Aggregate Expenditure AE = C+I+G+NX
Assume the general price level is constant.
a.What is the value of the marginal propensity to save?
b.What is the value of the multiplier?
c. Illustrate what is the value of autonomous AE and slope of the Aggregate expenditure (AE)?
d.Using the multiplier model, compute the value of equilibrium income (Y).
e.Now assume full-employment equilibrium output is 1000. What type of output gap exists and how much is the output gap? Use an aggregate demand (AD) and short run aggregate supply (AS) model to show the output gap graphically?
f.Suppose the government wanted to eliminate this gap by using fiscal policy by changing government expenditures. By how much government must change these expenditures to fill the output gap? Show your calculations.
g.find out the trade balance (NX) given equilibrium income found in part (d) above. Graph the trade balance function, label the diagram, and identify the two points found.