Suppose consumption and investment are described by the following:
C = 150 + 0.75DI
I = 300 + 0.2Y - 50r
Here DI is disposable income; Y is GDP, and r, the interest rate, is measured in percentage points.
X = 300
IM = 250 + 0.2Y
Government purchases are G = 800, and taxes are 20 percent of income. The price level is fixed and the central bank uses its monetary policy to peg the interest rate at r = 8.
a. Find equilibrium GDP, the budget deficit or surplus, and the trade deficit or surplus.
b. Suppose the currency appreciates and, as a result, exports and imports change to
X = 250
IM = 0.2Y
Now find equilibrium GDP, the budget deficit or surplus, and the trade deficit or surplus.