Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of

1.	Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.
Answer» C = 100 + 0.75YD I = 500 G = 750 X = 150 M = 100 + 0.2Y Equilibrium income (Y) = C + c (Y - T) + I + G + X - M -mY Or, Y = 100 + .75(Y - (20/100)Y) + 500 +750 + 150 - 100 - 0.2Y Or, 1400 + 75/100 x 4Y/5 - 0.2Y Or, Y = 1400 + 3/5Y - 0.2Y Y = 1400 + 2Y/5 Y -2Y/5 = 1400 Or, 3Y/5 =1400 Or, Y= 1400 x 5/3 = 7000/3 Government expenditure = 750 Government receipts (taxes) = 20/100 x 7000/3 = 1400/3 = 466.6 Since, government expenditure > government receipts It shows the government is running budget deficit NX = X - M – MY =150 - 100 - 0.2 x 7000/3 =150 - 100 - 1400/3 = 150 - 100 - 466.66 = 150 - 566.66 = -416.66 Since NX is negative, it implies trade deficit.

Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y. Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.

Answer»

C = 100 + 0.75YD
I = 500
G = 750
X = 150
M = 100 + 0.2Y
Equilibrium income (Y) = C + c (Y - T) + I + G + X - M -mY
Or, Y = 100 + .75(Y - (20/100)Y) + 500 +750 + 150 - 100 - 0.2Y

Or, 1400 + 75/100 x 4Y/5 - 0.2Y

Or, Y = 1400 + 3/5Y - 0.2Y

Y = 1400 + 2Y/5
Y -2Y/5 = 1400
Or, 3Y/5 =1400
Or, Y= 1400 x 5/3 = 7000/3
Government expenditure = 750
Government receipts (taxes) = 20/100 x 7000/3 = 1400/3 = 466.6

Since, government expenditure > government receipts

It shows the government is running budget deficit
NX = X - M – MY
=150 - 100 - 0.2 x 7000/3
=150 - 100 - 1400/3
= 150 - 100 - 466.66
= 150 - 566.66
= -416.66
Since NX is negative, it implies trade deficit.

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