Question

Consider an economy with the following data and answer the questions provided below.

Consumption expenditure = $180 b

Planned investment = $30 b

Government expenditure = $27 b

Export expenditure = $84 b

Import expenditure = $73 b

Autonomous taxes = $12 b

Income tax rate = 17%

Marginal propensity to save = 0.3

Marginal propensity to import = 0.1

1.If income currently equals $245b calculate the level of autonomous consumption (solve to two decimal places).

2.Calculate the level of total savings when the level of income is equal to $245 b (solve to two decimal places).

3.Calculate autonomous net exports when income is equal to $245b (solve to two decimal places).

4.Calculate the level of actual investment AND unplanned investment when income is equal to $245 b (solve answers to two decimal places).

5.Calculate autonomous planned expenditure for this economy (solve to two decimal places).

6.Is this economy in equilibrium when income equals $245 b? If not, what is the equilibrium level of income for this economy? (solve to two decimal places).

7.Illustrate this economy using the aggregate expenditure model. On your diagram, identify the equilibrium level of income as calculated in part 6 and the actual level of income ($245 b). Identify as required the vertical distance that represents unplanned investment calculated in part 4.Ensure you label all axis and each component (line) you draw in your diagram.

8.Calculate the tax multiplier for the economy (solve to two decimal places).

9.Assume that the government decides to change autonomous taxes in order to achieve equilibrium income. Will it need to raise, lower or leave unchanged autonomous taxes to achieve this? If autonomous taxes do need to change by how much do they need to be raised or lowered for the economy to be in equilibrium (solve to two decimal places).

10.What if instead of changing autonomous taxes the government decides to act directly to achieve a short run equilibrium? What would the government need to do precisely if it took a direct approach in its fiscal policy response.

11.Compare the impacts of both scenarios from parts 9 and 10 on the balance of the government budget which prior to this had been in deficit by $10b. If you had to advise the government on adoptingoneof these approaches which one would you argue for. Explain why.In your answer consider factors aside from the impact on the budget that may be relevant to the macroeconomy.