Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 per cent of income, X = 150, M = 100 + 0.2Y . Calculate equilibrium income, the budget deficit or surplus and the trade deficit or surplus.
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In a Given
C = 100 + 0.75YD
c = 0.75
I = 500,
G = 750
T = 0.20Y
M = 100 + 0.2Y
m = 0.2
X = 150
Equilibrium Income (Y) = C + c (Y - T) + I + G + X - M -mY
Y = 100 + 0.75 (Y – 0.20Y) + 500 + 750 + 150 – 100 – 0.2Y Y = 1400 + 0.75 (0.8Y) – 0.2 Y
Y = 1400 + 0.6Y – 0.2Y
Y = 1400 + 0.4Y
0.6 Y = 1400
Y = 1400/0.6 = 2333
Govt Expenditure = 750
Govt Receipts (Tax) = 2333 X 20% = 467
Govt Expenditure > Govt Receipts
It shows the government is running budget deficit.
NX = X - M – MY
= =150 - 100 - 0.2 x 2333
= 150 - 100 - 467
= 150 - 567
= - 417
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