Question

Problem 4

Consider the following economy:

Consumption Expenditure	446,832 million
Planned Investment Expenditure	346,877 million
Government Expenditure	446,832 million
Exports	402,443 million
Imports	388,374 million
Marginal Propensity to Save	0.3
Marginal Tax Rate	0.32
Autonomous Taxes	301,240 million
Marginal Propensity to Import (nx)	0.04

(e) Calculate the marginal leakage rate.  (0.5 mark)

(f) Assume that the natural rate of output for this economy is estimated as $1,200,000 million.

(i) Is this economy facing a recessionary or inflationary gap?  (0.5 mark)

(ii) Illustrate the gap you identified in part (i) above using both the AS-AD Model and the Aggregate Expenditure Model.  (1 mark)

(iii) Calculate the output ratio for this economy (0.5 mark)

(iv) If the government wishes to move the economy to its natural rate, will it need to increase or decrease spending? Calculate by how much it will need to change its spending.  (1 mark)

(v) Consider the policy action undertaken in part (iv) above and illustrate the impact on the money market.  (1 mark)

(vi) Given the impact on the money market determined in part (v) above, explain how this could affect the exchange rate market.  (1.5 marks)

(vii) Explain the policy action the government could undertake if it decides that it wants to move the economy to its natural rate but doesn’t want the action to affect its budget position.  

Answer 1