10. The following are equations for the open economy ofNaboo in billions of repu

ID: 1118115 • Letter: 1

Question

10. The following are equations for the open economy ofNaboo in billions of republican credits

Consumption: C = 120 + 0.75(Y-T)

Taxrevenue: T = 40 + 0.2Y

Investments: I = 230

Government spending: G =560

Exports: EX = 350

Imports: IM = 30 + 0.1Y

NFIA = 0 and NUT = 0

a.find the gross national disposable income (GNDI or Y) of Naboo

b.Using your answer in a above, find tax revenue and consumption of the Naboo

c.To what extent do you agree with the following statement: “ The Naboo are running a current account deficit”. Be sure to provide proof of answer

(a) In equilibrium, GDP = Y = C + I + G + EX - IM

Y = 120 + 0.75[Y - (40 + 0.2Y)] + 230 + 560 + 350 - (30 + 0.1Y)

Y = 1,260 + 0.75(Y - 40 - 0.2Y) - 30 - 0.1Y

Y = 1,230 + 0.75(0.8Y - 40) - 0.1Y

Y = 1,230 + 0.6Y - 30 - 0.1Y

(1 + 0.1 - 0.6)Y = 1,200

0.5Y = 1,200

Y = 2,400

(b)

T = 40 + (0.2 x 2,400) = 40 + 480 = 520

C = 120 + 0.75 x (2,400 - 520) = 120 + 0.75 x 1,880 = 120 + 1,410 = 1,530

(c)

Current account balance (CAB) = EX - IM

IM = 30 + (0.1 x 2,400) = 30 + 240 = 270

CAB = 350 - 270 = 80

Since CAB > 0, there is a current account surplus and the statement is incorrect.

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