| Question |
Suppose consumption and investment are described by the following: C = 150 + 0.75DI I = 300 + 0.2Y – 50r Here DI is disposable income; Y is GDP, and r, the interest rate, is measured in percentage points. X = 300 IM = 250 + 0.2Y Government purchases are G = 800, and taxes are 20 percent of income. The price level is fixed and the central bank uses its monetary policy to peg the interest rate at r = 8. a. Find equilibrium GDP, the budget deficit or surplus, and the trade deficit or surplus. b. Suppose the currency appreciates and, as a result, exports and imports change to X = 250 IM = 0.2Y Now find equilibrium GDP, the budget deficit or surplus, and the trade deficit or surplus. |
