Consider an open economy without a government sector.

| November 24, 2016

Question 3

(a) Consider an open economy without a government sector. It has the components of

aggregate spending as follows:

 C = 120 + 0.8Y

 M = 60

 I = 500

 X = 200

 C is consumption, Y is income, M is import, I is investment and X is export.

(i) Discuss and determine the saving function, the multiplier, the equilibrium

level of income and the trade balance at the equilibrium level of income.

(5 marks)

(ii) Suppose import now becomes positively related to output as M = 60 + 0.05Y.

What is the new multiplier, the new equilibrium level of income and the new

trade balance at this equilibrium level of income? Discuss.

(5 marks)

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