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Consider the following economy
Consider the following economy. C = 1000 + 0.8YD T = 0.25Y I = 325 G = 225 X = 450 M = 0.1Y
1)In equilibrium, this economy is...
a. A net exporter of 450. b. A net importer of 50. c. A net exporter of 50. d. There is insufficient information.
2)The government will run a budget surplus is GDP is greater than...
a. 775. b. 225. c.900. d.650.
Expert Solution
(1)
At equilibrium; Y = C + I + G + X - M
=> Y = 1000 + 0.8YD + 325 + 225 + 450 - 0.1Y
=> Y = 2000 + 0.8 (Y - T) - 0.1Y
=> Y = 2000 + 0.8(Y - 0.25Y) -0.1Y
=> Y = 2000 + 0.8(0.75Y) - 0.1Y
=> Y = 2000 + 0.6Y - 0.1Y
=> Y = 2000 + 0.5Y
=> Y -0.5Y = 2000
=> 0.5Y = 2000
=> Y = (2000 / 0.5)
=> Y = 4000
Equilibrium level of Y is 4000.
----------------
M =0.1Y
=> M = 0.1(4000)
=> M = 400
At equilibrium level of Y, the import is 400
and
At equilibrium level of Y, the export is 450
The export is higher than import by 50. It means the economy is a net exporter of 50.
Answer: Option (C)
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(2)
Government runs a budget surplus if taxes is higher than government spending.
i.e. T > G
=> 0.25Y > 225
=> Y > (225 /0.25)
=> Y > 900
It means the government will run a budget surplus if GDP is greater than 900.
Answer: Option (C)
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