Answer to Question #51140 in Macroeconomics for Husnyyy

Question

c. Given that money supply is KSh 1400 millions, autonomous consumption is KSh120 million, while the responsiveness of consumption to changes in disposable income is estimated to be 80% by the ministry of planning. Aggregate autonomous investment is ksh 200 million investment while one % increase in interest rate changes investment by KSh10 millions. The government collected KSh 200 million as tax revenue and wishes to increase expenditure by 10% above the revenue collected. The transactionary and precautionary demand for money function is expressed as mt/p=0.1y while the speculative money demand ms/p is -100r . compute the equilibrium national income, consumption and investments.

Answer 1

c. Money supply MS = KSh 1400 millions, autonomous consumption Ca = KSh120 million, c = 80%, aggregate autonomous investment Ia = ksh 200 million, 1% increase in interest rate changes investment by KSh10 millions. Taxes T = KSh 200 million, G = 1.1T.
The transactionary and precautionary demand for money function mt/p = 0.1y, speculative money demand ms/p = -100r
In equilibrium money demand equals money supply Md = Ms
Md = my/p + ms/p = 0.1y - 100r
So, 0.1y - 100r = 1400
r = 0.001Y - 14
Y = C + I + G
Y = 120 + 0.8(Y - 200) + 200 - 10i + 1.1*200
0.2Y = 380 - 10i
i = 38 - 0.02Y
That's why, 38 - 0.02Y = 0.001Y - 14
0.021Y = 52
So, the equilibrium national income Y = 2476.2
Consumption is C = 120 + 0.8(2476.2 - 200) = 1940.96
Investments I = 200 - 10i = 200 - 380 + 0.2*2476.2 = 315.24