Question 1

(a)Given the following information, calculate the level of real GDP that results in spending balance in the economy (T is taxes or tax revenue).

C = 100 + 0.7 (Y - T)

I = 100

G = 200

T = 200

X = 50 - 0.1Y

Real GDP = C + I + G + X = Y

= 100 + 0.7 (Y-200) + 100 + 200 + 50 - 0.1Y

Y= 310 - 0.6Y

0.6Y = 310

Y= 775

1) What is the MPC in this example? What is the MPS? What is the MPI? How does the MPI affect the slope of the AE line, compared with the same model without imports or exports?

In order to find the MPC in this case, we constructed a table between GPD and Consumption and the Consumption formula is:

C = 100 + 0.7 (Y-T)

Since MPC= ÃÂª Consumption /ÃÂª Income

= 3.5

/ 50

= 0.07

Which is equivalent t the slope of the consumption function.

Since MPS + MPC = 1

\MPS = 1 - MPC

= 1 - 0.7

= 0.3

MPI = D I / D GDP

But we do not know the changes in the amount of I and the GDP. Therefore, we need to take another approach in finding the MPI.

Now given the equation X = 50 - 0.1Y

Because export does not rely on the national income. However import does, so if we differentiate the export equation with respect to Y, we will get the MPI.

Now X = 50 - 0.1Y

Dx / Dy = -0.1

\ MPI = -0.1

The bigger the MPI, the steeper the slope of the AE line, As the greater amount of GDP, the greater the amount of import as more import is consumed it...