Table 20-1
Suppose the economy of Macroland is described by the following:
C = 200 + .8DI (DI = disposable income)
I = 300 + .2Y − 50r (Y = GDP)
(r, the interest rate, is measured in percentage points.For example, a 9 percent interest rate is r = 9).
For this economy, assume that the Federal Reserve uses its monetary policy to peg the interest rate at
r = 5
G = 750
T = .25Y
X = 200
M = 150 + .2Y
Hint: DI = Y − T
-From Table 20-1, find the budget deficit or surplus for Macroland.
A)125.50
B)−93.75
C)−126.25
D)−154.75

Question

Table 20-1
Suppose the economy of Macroland is described by the following:
C = 200 + .8DI (DI = disposable income)
I = 300 + .2Y − 50r (Y = GDP)
(r, the interest rate, is measured in percentage points.For example, a 9 percent interest rate is r = 9).
For this economy, assume that the Federal Reserve uses its monetary policy to peg the interest rate at
r = 5
G = 750
T = .25Y
X = 200
M = 150 + .2Y
Hint: DI = Y − T
-From Table 20-1, find the budget deficit or surplus for Macroland.
A)125.50 
B)−93.75 
C)−126.25 
D)−154.75

Quizplus · Accepted Answer

To find the budget deficit or surplus, we need to calculate total government spending (G) and total government revenues (T).

G = 750, because it is given in the problem.

To find T, we need to use the formula T = 0.25Y, where Y is GDP.

Y = C + I + G + X - M

Substituting the given values: 
Y = (200 + 0.8DI) + (300 + 0.2Y - 50r) + 750 + 200 - (150 + 0.2Y)

Simplifying: 
Y = 200 + 0.8(Y - T) + 300 + 0.2Y - 50(5) + 750 + 200 - 150 - 0.2Y 
Y = 2050 + 0.6Y - 0.8T

Solving for T: 
T = 0.25(2050 + 0.6Y - Y) 
T = 40 + 0.15Y

Now we can find the budget deficit or surplus:

Deficit/Surplus = T - G

Substituting the values: 
Deficit/Surplus = (40 + 0.15Y) - 750 
Deficit/Surplus = -710 + 0.15Y

To find Y, we can use the equation for DI: 
DI = Y - T 
Substituting T: 
DI = Y - (40 + 0.15Y) 
DI = 0.85Y - 40

Substituting DI into the equation for Y: 
Y = C + I + G + X - M 
Y = (200 + 0.8(0.85Y - 40)) + (300 + 0.2Y - 50(5)) + 750 + 200 - (150 + 0.2Y) 
Y = 1625 + 0.66Y

Solving for Y: 
0.34Y = 1625 
Y = 4779.41

Now we can find the budget deficit or surplus: 
Deficit/Surplus = -710 + 0.15(4779.41) - 750 
Deficit/Surplus = -710 + 716.91 - 750 
Deficit/Surplus = -93.75

Therefore, the budget deficit for Macroland is -93.75.

Table 20-1 Suppose the Economy of Macroland Is Described by the Following