Given the following variables in the open economy aggregate expenditure model: autonomous consumption, CO = 200; autonomous investment IO = 200; government spending, GO = 100; export spending, XO = 100; autonomous import spending, MO = 100; taxes, TP = 0; the marginal propensity to consume, c1 = 0.8; the marginal propensity to invest, i1 = 0.1; and the marginal propensity to import, m1 = 0.15.
[a] Calculate the equilibrium level of income for the open economy aggregate expenditure model. Show workings.
[b] If there is an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, calculate (1) the new equilibrium level of income and (2) the value of the multiplier. Show workings. Show workings.
[c] Compared with the original equilibrium in part [a.], if the government decides to impose taxes, TP = 100, calculate the new equilibrium level of income. Show workings.