Given the following variables in the open economy aggregate expenditure model,
Asked Mar 20, 2012, 09:06 AM
The following is my assignement and I am confused on the last part (c). I believe I am just setting the function wrong.
Given the following variables in the open economy aggregate expenditure model, autonomous consumption (Co) = 200, autonomous investment (Io) = 200, government spending (Go) = 100, export spending (Xo) = 100, autonomous import spending (Mo) = 100, taxes (Tp) = 0, marginal propensity to consume (Ci) = 0.8, marginal propensity to invest (i1), and marginal propensity to import (Mi) = 0.15,
a. Calculate the equilibrium level of income for the economy aggregate expenditure model.
b. If there is an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, calculate the new equilibrium level of income and the value of the multiplier.
c. Compared with the original equilibrium in part a, if the government decides to impose taxes (Tp) of 100, calculate the equilibrium level of income.
d. Hint: Remember that consumption has an autonomous component and is a function of disposable income Yd, where Yd = Y – Tp.
I have done:
(b) Ye=1,600 and m=4
The formula I used for (a) & (b):
E = Co + Io + Go + Xo – Mo + (c1 + i1 – m1)Y
E = 200 + 200 + 100 + 100 – 100 + (0.8 + 0.1 – 0.15)Y
E = 500 + 0.75Y
Y = 500 + 0.75Y
Y –i 0.75Y = 500
0.25Y = 500
YE = 2,000
With Part C
I believe the formula should be:
I am cofused how to infuse the (Y-Tp) in the formula.
Should it be 500+0.075y+y or 500+0.75y2 or 500+0.75+1