Suppose C = 100 + 0.75Y, $\triangle\text{I}=500,$ G = 750, taxes are 20% of income, X = 150, M = 100 + 0.2Y and classify whether it is budget deficit or surplus and trade deficit or surplus.
Download our app for free and get started
C = 100 + 0.75Y, $\Delta\text{I}=500,$ G = 750 X = 150, M = 100 + 0.2Y Equilibdum Income$=\text{C + c(Y}-\text{T})+\text{I + G + X}-\text{M}-\text{mY}$
$\text{Y}=100+0.75\Big(\text{Y}-\frac{20}{100}\text{Y}\Big)\\+500+750+150-100-0.2\text{Y}$
$\text{Y}=100+0.75\times\frac{80\text{Y}}{100}\\+1400-100-0.2\text{Y}$
$\text{Y}=1400+0.6\text{Y}-0.2\text{Y}$
$\text{Y}=1400+0.4\text{Y}$
$\text{Y}-0.4\text{Y}=1400$
$0.6\text{Y}=1400$
$\text{Y}=\frac{1400}{0.6}$
$=\frac{700}{0.3}$
$=2333.3=\frac{7000}{3}$
Government tax $=\frac{20}{100}\times\frac{7000}{3}=\frac{1400}{3}=466.6$ Government expenditure > Government receipts It shows budget deficit$\text{NX = X}-\text{M}-\text{mY}$
$=150-100-\frac{2}{10}\times\frac{7000}{3}$
$=150-100-466.66$
$=-416.66$
Here, NX is negative. Thus, it implies trade deficit.
$\text{Y}=100+0.75\Big(\text{Y}-\frac{20}{100}\text{Y}\Big)\\+500+750+150-100-0.2\text{Y}$
$\text{Y}=100+0.75\times\frac{80\text{Y}}{100}\\+1400-100-0.2\text{Y}$
$\text{Y}=1400+0.6\text{Y}-0.2\text{Y}$
$\text{Y}=1400+0.4\text{Y}$
$\text{Y}-0.4\text{Y}=1400$
$0.6\text{Y}=1400$
$\text{Y}=\frac{1400}{0.6}$
$=\frac{700}{0.3}$
$=2333.3=\frac{7000}{3}$
Government tax $=\frac{20}{100}\times\frac{7000}{3}=\frac{1400}{3}=466.6$ Government expenditure > Government receipts It shows budget deficit$\text{NX = X}-\text{M}-\text{mY}$
$=150-100-\frac{2}{10}\times\frac{7000}{3}$
$=150-100-466.66$
$=-416.66$
Here, NX is negative. Thus, it implies trade deficit.
Download our appand get started for free
Experience the future of education. Simply download our apps or reach out to us for more information. Let's shape the future of learning together!No signup needed.*
Similar Questions
- 1View SolutionExplain the distinction between the flexible exchange rate and the managed floating exchange rate.
- 2View SolutionThe following figures are based on BoP accounts:
Calculate:S.No.(₹ in crores)1.Import of goods.8002.Export of goods.5503.Import of services (Banking, Shipping, Insurance, Tourism, etc.)504.Export of services (Banking, Shipping, Insurance, Tourism, etc.)1505.Unilateral transfers from rest of the world (Gifts, Aids, etc.)1006.Unilateral transfers to rest of the world (Gifts, Aids, etc.)807.Capital receipts (Loan from foreigners, Sale of assets to foreigners, Receipt of capital from foreigners).2008.Capital Payments (Loans to foreigners, Buying of assets from foreigners, Payment of capital to foreigners).70- Balance of Trade.
- Balance of Payments on Current Account.
- Balance Payments on Capital Account.
- Balance of Payments.
- 3View SolutionDistinguish:
- Between current account and capital account.
- Between autonomous transactions and accommodating transactions of balance of payments account.
- 4View SolutionWhy does the demand for foreign currency fall and supply rises when its price rises? Explain.
- 5View SolutionDefine fixed exchange rate. How is the exchange rate determined in a flexible exchange rate system?
- 6View Solution
- In which sub-account and on which side of balance of payments account will foreign investments in India be recorded? Give reasons.
- What will be the effect of foreign investments in India on exchange rate? Explain.
- 7Calculate:View Solution
- Operating Surplus.
- Domestic Income.
$(₹$ in crores$)$ $(i)$ Compensation of employees $2,000$ $(ii)$ Rent and interest $800$ $(iii)$ Indirect taxes $120$ $(iv)$ Corporation tax $460$ $(v)$ Consumtion of fixed capital $100$ $(vi)$ Subsidies $20$ $(vii)$ Dividend $940$ $(viii)$ Undistributed profits $300$ $(ix)$ Net factor income to abroad $150$ $(x)$ Mixed income $200$ - 8View SolutionDiscuss briefly the meanings of:
- Fixed Exchange Rate.
- Flexible Exchange Rate.
- Managed Floating Exchange Rate.
- 9View SolutionIndian investors borrow from abroad. Answer the following:
- In which sub-account and on which side of the Balance of Payments Account will this borrowing be recorded? Give reason.
- Explain what is the impact of this borrowing on exchange rate.
- 10View SolutionSuppose 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.