MGEA06 Tutorial #9 (Revised)
• Question 1 (Based on midterm question – Winter 2012)
The economy in question is an open economy that faces fixed prices. In addition, the economy
can be described by the income-expenditure model and the following set of equations:
Consumption: C = 440 + 0.6YD; where YD = disposable income
Investment (I Plannned I = 240 – 50(r – 0.06)
Government spending: G = 300
Taxes: T = 60 + 0.15Y
Transfers: TR = 290 – 0.15Y
Exports: X = 480
Imports: IM = 58 + 0.22Y
NOTE: 1) Unless otherwise stated, r is held constant at 0.06 (6%).
2) Keep your answers to 2 decimal points if necessary.
a) What is the equilibrium level of output?
b) Find the government budget balance. Is the government running a budget surplus or budget
The economy is initially in its long-run equilibrium as shown in part (a). Now, a wave of
pessimism sweeps the country such that firms become more pessimistic about the future. As a
result, autonomous investment changes by 30.
c) Find the new equilibrium level of output.
d) What happens to the government budget balance after the change in business confidence?
Find the change in cyclical budget balance as a result of this change in business confidence.
MGEA06 Revised Tutorial 9 Iris Au 1 • Question 21
This problem deals