Reference no: EM13975933
5.Given the following variables in the open economy aggregate expenditure model,autonomous consumption (C0)= 200, autonomous investment (I0)= 200, government spending (G0)= 100, export spending (X0)= 100, autonomous import spending (M0)= 100, taxes (TP) = 0, marginalpropensity toconsume (c1)= 0.8, marginal propensity to invest (i1)= 0.1, and marginal propensity toimport (m1)= 0.15,
a.Calculate the equilibrium level of income for the open economy aggregateexpenditure model.
b.If there is an increase in autonomous import expenditure from 100 to 200resulting from an increase in the currency exchange rate, calculate the newequilibrium level of income and the value of the multiplier.
c.Compared with the original equilibrium in part a, if the government decides toimpose taxes (TP) of 100, calculate thenew equilibrium level of income.
Hint: Remember thatconsumption has an autonomous component and is a function of disposable income,Yd, where Yd =Y -TP
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