Question: C = 10 + 0.9 (Y-T), I = 80, G = 65, and T = 50
Imports and exports are given by:
IM = 0.3Y and X = 0.2Y*
Foreign income (Y*) = 1000
(a) Solve for equilibrium output in the domestic economy.
(b) Solve for the trade balance. Does the country have a trade surplus or deficit?
(c) Draw representative graphs of the goods market and net-exports. Draw your graphs to illustrate the trade balance at the equilibrium level of output.
(d) What happens to equilibrium output and the trade balance if foreign income increases to 1200? Show the impact of this change on the graphs that you drew in part c.