Question SECTION A: APPLICATION QUESTIONS (20%) Imagine an economy defined by the following: C = 150 + 0.9 (Y - T). This is the consumption function where 140 is autonomous consumption, 0.9 is the marginal propensity to consume, and Y-T is disposable (i.e. after tax income). T = Tax Revenues = 0.2Y I = Investment = 200 G = Government spending = 600 X = Exports = 800 M = Imports = 0.1Y All the autonomous expenditures are given in $ million. a) Determine the aggregate expenditure(AE) equation. Show all necessary workings. (5 marks) (. (15 marks)

b) Determine the equilibrium level of income. Show all necessary workings. c) Explain the governments budget and trade balance and determine the size of the governments budget and trade balance d) Suppose the full-employment income is $5,000 million. Describe the current economic situation based on the result in part(b). How much more does the government need to spend to have the equilibrium income equal to the full-employment income? Show all necessary workings. (15 marks) e) Suppose that because of changes in the relative prices of domestic and foreign goods, the marginal propensity to import falls to 0.05. Calculate the equilibrium income when the marginal propensity to import is changed to 0.05. (5 marks) f) Suppose because of a surge of business confidence, investment rises to 500. Calculate the equilibrium output. (5 marks) (Total: 50 Marks)

ECO102 (May 2023 Semester, Final Assignment) Rubric Marking Section A: Application Questions