Suppose C = 40 + 0.8YD, T = 50, I = 60, G = 40, X = 90, M = 50 + 0.05Y (a) Find equilibrium income. (b) Find the net export balance at equilibrium income (c) What happens to equilibrium income and the net export balance when the government purchases increase from 40 and 50?
Equilibrium income = 560
Net export balance at equilibrium = 12
When government purchases increase from 40 to 50: Equilibrium income increases from 560 to 600. Net export balance decreases from 12 to 10.
Explanation
This question tests understanding of equilibrium income determination in an open economy. The student must apply the equilibrium condition Y = C + I + G + X - M, substitute the given functions, and solve for Y. Part (c) requires understanding that an increase in government spending raises income through the multiplier effect, but higher income leads to more imports, reducing net exports.