if consumption (c)= 40+0.8y, investment (I) = 100, government expenditure = 80 export (x) = 60 import (m) = 50+0.05 y, calculate open economy multiplier and equilibrium income.
Answers
Explanation:
Open economy=1/1-C+(M)
Equillibrium income=C+I+G+(X-M)
The answer is 4 and $920.
Explanation:
Given that,
Consumption: c = 40 + 0.8y
Investment (I) = 100
Government expenditure (G) = 80
Export (x) = 60
Import (m) = 50 + 0.05 y
Marginal propensity to consume (MPC) = 0.8
Marginal propensity to import (MPM) = 0.05
Equilibrium income is at a point where the total demand is equal to the total supply in an economy.
Total demand is the sum total of consumption spending, government spending, investment spending and exports in an economy.
Total supply is the sum total of total production in an economy and the amount of imports.
Therefore,
Total demand = Total supply
C + I + G + x = y + M
(40 + 0.8y) + 100 + 80 + 60 = y + 50 + 0.05 y
230 + 0.8y = 1.05 y
230 = 1.05 y - 0.8y
230 = 0.25 y
920 = y
Therefore, the equilibrium income is $920.
Multiplier:
= 1 ÷ (1 - MPC + MPM)
= 1 ÷ (1 - 0.8 + 0.05)
= 1 ÷ (0.25)
= 4
Therefore, the economy multiplier is 4.
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