I) Solve the following motor cars market model for Q and P. QD = 80 - P (1)
QS = 50 + P (2)
Assume now that the motor cars market is at equilibrium. Then, consider,
diagrammatically, the effects on the market of a simultaneous decrease in the price of train fares (Ptr) and an increase in the price of steel (Ps).
Let consider a general case for the motor cars market model:
QD = a - b. P (1) QS = c + d. P (2) whereby (a, b,c, d>0).
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(ii) Discuss the intuition of the parameters (a, b,c, d). Then, solve for the equilibrium quantity and price.
Next, the government reduces the fee on registration of new cars. How does this policy affect the equilibrium quantity and price of the motor cars market?
Part 2. Economic Model: 2 points.
The following represents a closed economy Y =C+I+G
C = a + bYD YD = Y – T T =tY
Whereby: Y=Income; I=Investment; G=Government Spending; C=Consumption; YD = Disposable Income; T = Taxes; and (a, b, t) are parameters.
Now assume that I=200, G=250, a=20, b=0.6, t=0.2.
(i) Derive the solution for Y. And compute the value for Y as well as the corresponding value of the government budget balance. Is the government budget surplus or deficit? And what is the value of the multiplier? Then, use the multiplier to compute how much does the value of Y change when the value of G increases by 30.
Now assume that the economy is small and integrate into the world economy. Then, there is an additional demand from the world economy, which is captured by the value of net exports. This term is defined as the value of exports minus imports. The new equations are as following:
Y =C+I+G+NX C = a + b YD
YD = Y – T
T =tY
NX = nY
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Whereby: Y=Income; I=Investment; G=Government Spending; C=Consumption; NX = Net exports = Exports - Imports; YD = Disposable Income; T = Taxes; and (a, b, t, n) are parameters.
(ii) Solve for the value of Y. And does the value of Y increase or decrease for an increase of n?