Part B

Assume the following data for the Australian economy (in billion $) then answer the questions that follow.Assume I, G and NX are independent of the level of income:

C = 120 + 0.6Y

I = 230

G = 330

NX = +60

Required:

(i)Calculate the marginal propensity to consume and calculate the value of the expenditure multiplier.

(ii)At what value of Real GDP does equilibrium exist?

(iii)Assume Potential RGDP = $2,000 billion.Does this economy have an inflationary or recessionary gap?What is the value of this gap?

(iv)By how much will the government need to change Government spending and in what direction, so that equilibrium RGDP equals Potential RGDP?

(v)If the government decided to change income tax, by how much will the Government need to change taxation and in what direction?

(vi)Are your answers to parts (iv) and (v) the same?Briefly explain why or why not.

(vii) What is the economic objective of this type of fiscal policy in regard to the level and type of unemployment?Briefly explain your answer.