Calculate the level of autonomous consumption

Question

Assignment:

Topics:

1. The Inflation-Unemployment Trade-off

2. The 4 Sectors of the Economy-Household and Business Sectors

3. The 4 Sectors of the Economy-Adding the External Sector(AE Model)

4. The 4 Sectors of the Economy-Government Sector

5. The Money Market, Financial Markets and Monetary Policy

The assignment consists of problems based on a scenario analysis.

Your answers must be provided in the word document attached; under each of the corresponding sections in the word document. Where mathematical calculations are required you must state the equation used as well as each step in your calculations.

For required diagrams you can either draw directly in the word document using 'shapes' and 'text boxes' for labelling (please remember to 'group' all your diagram items as they are likely to move on in your document - especially when you upload the word file and you will lose marks if we cannot 'see' it properly) or you can draw the diagram free-hand on paper, take a photo and paste into the word document. Do not copy and paste diagrams out of textbooks, web pages, provided lecture slides....... This must represent your own work.

PROBLEM

Consider an economy with the following data:

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

Section A

Part (1)

Calculate the level of autonomous consumption when the level of income equals $450,179 million (solve to one decimal point).

Part (2)

Calculate the level of total savings when the level of income equals $450,179 million (solve to one decimal point).

Part (3)

Calculate the level of actual investment when income is equal to $450,179 million and the unintended inventory investment (solve to one decimal point).

Part (4)

Calculate autonomous imports when income is equal to $450,179 million (solve to one decimal point).

Part (5)

Calculate autonomous net exports (solve to one decimal point).

Part (6)

Calculate autonomous planned expenditure (solve to one decimal point).

Part (7)

Is this economy in equilibrium when income equals $450,179 million? If not, what is the equilibrium level of income for this economy? (solve to one decimal point).

Part (8)

Calculate the marginal leakage rate (solve to two decimal points). In your own words, briefly explain what the marginal leakage rate symbolises for the economy (60-word limit).

Part (9)

Calculate the expenditure and tax multipliers for the economy (solve to two decimal points).

Section B

Assume that your economy is now operating at the equilibrium level in the short-run as calculated in part (7).

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 he exchange rate in part (14). Identify the new equilibrium on the diagram as point B. (100-word limit)