Question

Consumption expenditure = $262,619.0 million
Planned investment = $86,227.0 million
Government expenditure = $113,601.0 million
Export expenditure = $99,804.0 million
Import expenditure = $97,424.0 million
Autonomous taxes = $56,700.0 million
Income tax rate = 28%
Marginal propensity to save = 0.4
Marginal propensity to import = 0.1

Part (10)

Illustrate the GDP gap using the AD-AS Model and the AE Model, if the natural level of income is estimated as $490,000 million.

Part (11)

If the government wants to close the existing GDP gap (use your calculated equilibrium value for ‘actual’), calculate the change in spending (specify whether an increase or decrease) that would have to be undertaken. (solve to one decimal point)

Part (12)

Briefly discuss the consequences for the economy of the above policy action if the “crowding-out” effect is present in this economy. How will the multiplier process be affected? (100 word limit)

Part (13)

Assume the central bank decides to move and close the GDP gap instead of using fiscal policy.

In what direction will interest rates have to move to close the GDP gap and what type of open market operation will the central bank undertake?

Part (14)

Using the exchange rate market model, illustrate and explain how the monetary policy action identified in part (13) may affect the exchange rate. Identify the new equilibrium on the diagram as point B. (100-word limit)

Part (15)

Using the IS-LM model, illustrate and explain how the economy and the unemployment rate may be impacted as a result of the change in the exchange rate in part (14). Identify the new equilibrium on the diagram as point B. (100-word limit)

Answer 1