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 `(Y - 20/100 Y)`+ 500 +750 + 150 − 100 − 0.2Y

Or, `Y = 1400 + 75/100 xx (4Y)/5 - 0.2Y `

Or, `Y = 1400 + 3/5Y - 0.2Y`

Or, `(6Y)/10 =1400`

Or, `Y = (1400xx10)/6 = 7000/3`

Government expenditure = 750

Government receipts (taxes) `=20/100xx7000/3=1400/3=466.6`

Since, government expenditure > government receipts

It shows the government is running budget deficit

NX = X − M − MY

`= 150-100-0.2/10xx7000/3`

`=150-100 - 1400/3`

= 150 − 100 − 466.66

= 150 − 566.66

= − 416.66

Since NX is negative, it implies trade deficit.