Question

S-80+0.25Y, and import function is given as 100-0.05Y then find:

(a) At what level equilibrium level of income and consumption level will occur?
(b) If govt. expenditure increase by 55 Cr. And govt. imposes the lumpsum taxes worth 15 Cr
what impact it will have on consumption and income 1

(c) What will happen to imports if government raises the import duty by 10%?
(d) Calculate the multipliers of government expenditure and foreign trade.​

Answer 1

Answer:

a) Savings Function = $-80+0.25$

• S= Y-C
• Y=S+C
• Y= $-80 + 0.25+C$
• C= $80+0.75$Y
• Consumption function = $80+0.75$Y
• In an economy, equilibrium is when Aggregate Demand is equal to Aggregate Supply.
• Y=C+I+G+X-M
• Y=$80 + 0.75Y + 100 - 0.05Y$
• Y-$0.80Y$= $180$
• Y= $900$

The equilibrium level of income = $900$

b) If the government imposes lump-sum taxes worth $15$ crore then the consumption function along with the income of individuals decreases since there will be a reduction in disposable income of the individuals involved.

An increase in government expenditure by Rs. $55$ crores on the other hand will result in an increase in national income.

• C= $80 + 0.75 (Y-T) = 80 + 0.75(Y-15) = 80 + 0.75Y-11.25$
• New equilibrium income is:-
• Y=C+I+G+X-M
• $Y = 80 + 0.75Y-11.25 + 55 + 100-0.05Y$
• Y = $1,118.75$
• It is the new equilibrium national income

c) If the government raises the import tariff by ten percent, imports will rise by ten percent. As a result, the cost of imports will be significantly higher.

d) Government expenditure multiplier = Change in income/ change in government expenditure

• Change in income = $1,118.75-900=218.75$
• The government expenditure becomes $55$
• Government expenditure multiplier on calculating becomes $4$
• Foreign trade multiplier = 1/(MPS+MPI)
• MPS is $0.25$ and MPI is $218.75$
• Change in imports after calculating is $95.5-55=40.5$
• Foreign trade multiplier is $0.025$

#SPJ3