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Consider the following structure
Consider the following structure. Consumption: C = 60+ 0.6Ya Taxes: T = 40 + 0.25Y Transfer Payments: TR = 20 Investment: I= 60 Government Purchases: G = 70 Exports: X = 44 Imports: M = 10 + 0.15Y a. (10 points)Solve for the equilibrium level of GDP and show it on a Keynesian cross diagram. b. (10 points)Formally derive a spending multiplier for this economy. c. (10 points)Figure out the change in equilibrium level of GDP if exports rises to 64. d. (10 points)Derive the aggregate demand (AD) curve from the aggregate expenditure (AE) diagram and show what will change in the AD diagram after this change in exports.
Expert Solution
a) Equilibrium occurs when Consumption + Investment + Government spending + Exports - Imports
Y = 60 + 0.6Yd + 60 + 70 + 44 - 10 - 0.15Y
where Yd = Y - T
Y = 60 + 0.6 * (Y - 40 - 0.25Y) + 60 + 70 + 44 - 10 - 0.15Y
Y = 60 + 0.45Y - 24 + 60 + 70 + 44 - 10 - 0.15Y
0.7Y = 200
Y = 285.71
b) Spending multiplier = [1 / (1 - MPC)] = [1 / (1 - 0.6)] = 2.5
c) If exports rises by 64, new equilibrium level is Y + 64 * Spending multiplier = 285.71 + 64 * 2.5 = 444.71
d)please see the attached file for the complete solution.
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