Consider an economy with the following data:

Consumption expenditure = $171,650.0 million

Planned investment = $118,972.0 million

Government expenditure = $48,666.0 million

Export expenditure = $840,148.0 million

Import expenditure = $720,652.0 million

Autonomous taxes = $206,700.0 million

Income tax rate = 18%

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 $520,240 million (solve to one decimal point).

Part (2)

Calculate the level of total savings when the level of income equals $520,240 million (solve to one decimal point).

Part (3)

Calculate the level of actual investment when income is equal to $520,240 million and the unintended inventory investment (solve to one decimal point).

Part (4)

Calculate autonomous imports when income is equal to $520,240 million (solve to one decimal point).

Part (5)

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

Part (6)

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

Part (7)

Is this economy in equilibrium when income equals $520,240 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 one decimal point).

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 $460,000 million.

Part (11)

If the government wants to close the existing GDP gap, 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 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 may be impacted as a result of the change in the exchange rate in part (14). Identify the new equilibrium on the diagram as point B. (100-word limit)

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