DSE 2007 question 39

[Addy-2]

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[Addy-2]

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[knowpraveen]

Hey gul,

Substitute the values for the respective parametric coefficients and exogenous values. I'll explain the question first, these are two open economies trading with each other (which is obvious from the options, since they have given 'vis-a-vis' in the options, meaning trade with each other).

So, for Economy1 the market equilibrium equation could be obtained by Y1= C+I+G+X-IM/1, since exchange rate is unity. Here X is the imports of the second economy. Going in a similar manner for the second economy, you get two equations in Y2 and Y1.

15Y2 - 0.75Y1 = 8550
-0.3Y2 + 0.75Y1 = 564

Solving these eqns leaves us with Y1=1000 and Y2 = 620.

Find X1 - IM1 to find out whether it runs a trade deficit of surplus or if its balances out. Here, it turns out to be 136. Hope you got it, gul. =)