Consider the Australian economy in 2006. At this time Australia economic growth was primarily being driven by a mining boom built on China's demand for Australian iron ore. Assume that the Australia economy can be represented using a 4-sector multiplier model and the following hypothetical information: (All amounts are expressed in $m) c0 = 500, I = 1,000, G = 2,000, X = 1,000, c1 = 0.8, t = 0.125 and m = 0.1 a) What is the equation for aggregate demand (AD) in the Australian economy in 2006?

b) Calculate the equilibrium value of income (GDP) in the Australian economy in 2006 and represent this in a fully labelled multiplier model diagram. Label all relevant axes, axis-intercept points, equilibrium points and curves on your model.

c) Assume that in 2007 the Australian economy experiences an increase in demand for its iron ore China so that in 2007 the value of Australian exports is $1,200m up from $1,000m in 2006. What is the equation for AD in the Australian economy in 2007 and calculate the level of equilibrium GDP in 2007.

d) Represent the situation described in c) in a multiplier model diagram. Show and describe, using the diagram and words, the first two rounds of the multiplier process following the increase in export spending. Include in your answer the relevant calculations for these two rounds of the multiplier process.

e) What was Australian government's budget outcome for 2006 and 2007? Has the Australian government's budget position improved, deteriorated or not changed between 2006 and 2007.