Suppose C = 100 + 0.75Y D, I = 500, G = 750, taxes are 20 percent 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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C = 100 + 0.75YD I = 500 G = 750 X = 150 M = 100 + 0.2Y Equilibrium income (Y) = C + c (Y − T) + I + G + X − M − mY$\text{Y}=100+0.75\Big(\text{Y}-\frac{20}{100}\text{Y}\Big)+500+750+150-100-0.2\text{Y}$
$\text{Y}=1400+\frac{75}{100}\times\frac{4\text{Y}}{5}-0.2\text{Y}$
$\text{Y}=1400+\frac{3\text{Y}}{5}-0.2\text{Y}$
$\frac{6\text{Y}}{10}=1400$
$\text{Y}=\frac{1400\times10}{6}=\frac{7000}{3}$
Government expenditure = 750 Government receipts (taxes) $\frac{20}{100}\times\frac{7000}{3}=\frac{1400}{3}=466.6$ Since, government expenditure > government receipts It shows the government is running budget deficit NX = X − M − MY$=150-100-\frac{0.2}{10}\times\frac{7000}{3}$
$=150-100-\frac{1400}{3}$
$= 150 − 100 − 466.66$
$= 150 − 566.66$
$= − 416.66$
Since NX is negative, it implies trade deficit.
$\text{Y}=1400+\frac{75}{100}\times\frac{4\text{Y}}{5}-0.2\text{Y}$
$\text{Y}=1400+\frac{3\text{Y}}{5}-0.2\text{Y}$
$\frac{6\text{Y}}{10}=1400$
$\text{Y}=\frac{1400\times10}{6}=\frac{7000}{3}$
Government expenditure = 750 Government receipts (taxes) $\frac{20}{100}\times\frac{7000}{3}=\frac{1400}{3}=466.6$ Since, government expenditure > government receipts It shows the government is running budget deficit NX = X − M − MY$=150-100-\frac{0.2}{10}\times\frac{7000}{3}$
$=150-100-\frac{1400}{3}$
$= 150 − 100 − 466.66$
$= 150 − 566.66$
$= − 416.66$
Since NX is negative, it implies trade deficit.
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