Question

Suppose C = 100 + 0.75YD, I = 500, G = 750, taxes are 20% 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 + 0.75 YD

I = 500

G = 750

X = 150

M = 100 + 0.2Y

Equilibrium income = C + c (Y - T) + l + G + X - M - mY

Y = $100+0.75(Y-\frac{20}{100}Y)+500+750+150-100-0.2Y$

Y = $1400+\frac{75}{100}\times \frac{4Y}{5}-0.2Y$

Y = $1400+\frac{3}{5}Y-0.2Y$

= $1400+\frac{2Y}{5}$

$\frac{3Y}{5}=1400$

Y = $\frac{7000}{3}$

Government expenditure = 750

Government receipts(taxes) = $\frac{20}{100}\times \frac{7000}{3}=\frac{1400}{3}=466.6$

Since, Government Expenditure > Government receipts

It shows the government is running on budget deficit.

NX = X - M - mY

= $150-100-\frac{2}{10}\times \frac{7000}{3}$

= 150 - 100 - 466.66

= -416.66

Here, NX is negative.

Thus, it implies a trade deficit.