Question

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 1

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 + 500 +750 + 150 − 100 − 0.2Y

Or,

Or,

Or,

Or,

Government expenditure = 750

Government receipts (taxes)

Since, government expenditure > government receipts

It shows the government is running budget deficit

NX = X − M − MY

= 150 − 100 − 466.66

= 150 − 566.66

= − 416.66

Since NX is negative, it implies trade deficit.