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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.
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Solution
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.
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