You are given the following model that describes the economy of Hypothetica. • 1

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You are given the following model that describes the economy of Hypothetica. • 1)Consumption function: C=100 + .8Yd 2) Planned investment: I = 38 3) Government spending: G = 75 4) Exports: EX = 25 5) Imports: IM = .05 Yd 6) Disposable income: Yd = Y - T 7) Taxes: T = 40 8) Planned aggregate expenditure: AE = C + I + G + EX - IM 9) Definition of equilibrium income: Y = AE 1. 1. What is equilibrium income in Hypothetica? What is the government deficit? What is the current account balance? 2. If government spending is increased to G = 80, what happens to equilibrium income? Explain using the government spending multiplier. What happens to imports? 3. Now suppose the amount of imports is limited to IM = 40 by a quota on imports. If government spending is again increased from 75 to 80, what happens to equilibrium income? Explain why the same increase in G has a bigger effect on income in the second case. What is it about the presence of imports that changes the value of the multiplier? 4. If expects are fixed at EX = 25, what must income be to ensure a current account balance of zero? (Hint - imports depend on income, so what must income be for imports to be equal to exports?) By how much must we cut government spending to balance the current account? (Hint - Use your answer to the first part of this question to determine how much of a decrease in income is needed. Then use the multiplier to calculate the decrease in G needed to reduce income by that amount

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My professor asked the same question to me.He also wanted me to solve the analysis in an essay form.Could you find any answer?

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