Suppose the components of spending in an economy are as follows:
C=100+ 0.75Y M = 50 + 0.25Y I=400 X = 300
a) What is the equilibrium level of income (Y)? (Hint: Y=C+I+X-M)
b) What is the trade balance (X-M) at this equilibrium ?
c) Suppose exports increase by 100. What is the new equilibrium level of income?
d) What is the trade balance? (X-M) at the new equilibrium? Did the trade balance improve by the increase in exports of 100? Explain.