Equilibrium in a Simple Keynesian Model: Numerical Example Suppose that the following parameters...

Equilibrium in a Simple Keynesian Model: Numerical Example

Suppose that the following parameters apply to an open economy with a government that is running a balanced budget.

Autonomous consumption =$200 billion

Marginal propensity to consume = 0.8

Investment = $50 billion

Taxes (lump sum) =40 billion

Government spending (G) = 40 billion

Exports (X) = 80 billion

Import Function = M = 0.1 Yd

(Recall: Yd = disposable income = Y - T

Answer the following questions:

I. Write an expression for the consumption function (don't forget the taxes!)

2. Write an expression for the aggregate expenditure function.

3. Find equilibrium income.

4. What is the marginal propensity to import?

5. What is the size of the trade deficit/surplus?