Consider an open economy with Y as the national income such that: (i) Consumption function is Keynesian type so that con

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Consider An Open Economy With Y As The National Income Such That I Consumption Function Is Keynesian Type So That Con 1 (114.51 KiB) Viewed 27 times

Consider an open economy with Y as the national income such that: (i) Consumption function is Keynesian type so that consumption is 0 when the disposable income is 0 and the marginal propensity to consume is 700 out of every 1000 units of disposable income. (ii) The economy follows a proportional tax system where half of the income is taxed (iii) Investment and Government spending are exogenous respectively being 500 and 900 respectively. (iv) Exports for the economy are exogenous which is set to 500 but imports are proportional to national income such that imports are one-tenth of the national income. (a) Express the economy in the form of equations clearly explaining each component of the expenditure. (b) Find the aggregate expenditure function and also solve for Y. (c) Suppose that the marginal propensity to import rises to 0.2, as a result of changes in the relative prices of foreign and domestic goods. Compute the new equilibrium output and provide an intuitive explanation of the change in the equilibrium output (d) Assume that the full employment level of output is 6,000. What level of government expenditure would be necessary to reach the full employment level?