Given the following variables in the open economy Hint: Remember that consumption has an autonomous aggregate expenditure model, autonomous component and is a function of disposable consumption (C0) = 200, autonomous investment income, Yd, where Yd = Y - TP. (I0) = 200, government spending (G0) = 100, export spending (X0) = 100, autonomous import spending (M0) = 100, taxes (TP) = 0, marginal propensity to consume (c1) = 0.8, marginal propensity to invest (i1) = 0.1, and marginal propensity to import (m1) = 0.15, a. Calculate the equilibrium level of income for the open economy aggregate expenditure model. b. If there is an increase in autonomous import expenditure from 100 to 200 resulting from an increase in the currency exchange rate, calculate the new equilibrium level of income and the value of the multiplier. c. Compared with the original equilibrium in part a, if the government decides to impose taxes (TP) of 100, calculate the new equilibrium level of income.
Use the aggregate expenditure model developed in this chapter to explain the following statements:
a. Coming amid continued turmoil in the financial and credit markets, the report sent stocks lower, with the Dow Jones Industrial Average falling 146.70 points Friday to close at 11,893.69.
b. Administration officials said they were confident conditions would improve as tax rebates that are part of the recent $152 billion economic stimulus package begin to reach consumers.
c. The Fed is expected to cut interest rates again to prop up the economy.