Australian investment - Fixed Exchange Rate System
Not what you're looking for?
---
Refer to graph attached.
1. Starting at equilibrium income $50 billion, where (S - I)0 intersects (X - M) 0, suppose that worsening economic conditions abroad lead to an autonomous decrease in Australian exports of $5 billion. How much will Australian income be? What will Australia's trade account balance be? Explain your reasoning.
2. Starting at equilibrium income $50 billion, where (S - I) 0 intersects (X - M) 0, suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion. How much will Australian income be? What will Australia's trade account balance be? Explain your reasoning.
3. Starting at equilibrium income $50 billion, where (S - I) 0 intersects (X - M) 0, suppose that increased thriftiness leads to an autonomous increase in Australian saving of $5 billion. How much will Australian income be? What will Australia's trade account balance be? Explain your reasoning.
4. Starting at equilibrium income $50 billion, where (S - I) 0 intersects (X - M) 0, suppose that changing preferences lead to an autonomous increase in Australian imports of $5 billion. How much will Australian income be? What will Australia's trade account balance be? Explain your reasoning.
5. As indicated by the slope of the (X - M) schedule and (S - I) schedule, what is the value of Australia's foreign trade multiplier?
---
Purchase this Solution
Solution Summary
Australian investment is assessed in these problems.
Solution Preview
Question 1
If there is an autonomous decrease in Australian exports (X), this means that the (X-M) schedule must move down, because now net exports will be lower for any income level. The (S-I) schedule wil remain unchanged.
So basically, what happens here is that (S-I) remain at (S-I)0, while (X-M) moves to (X-M)2 (notice that (X-M)2 is exactly the same as (X-M)0 minus 5 billion, which is the amount by which exports fall).
Looking at where the intersection between these lines happen, we conclude that income will fall to $40 billion and there will be a trade balance (X-M) deficit of -2.5 billion. The result is then that the Australian economy will enter a recession (because its aggregate demand -specifically, its exports component- falls) and will run a trade deficit, as a result lower exports.
Question 2
If there is an autonomous increase in Australian investment (I) of 5 billion, we can expect the (S-I) schedule to fall by 5 billion. (S-I) will be 5 billion lower for any income level, so its schedule will shift down. The (X-M) schedule remains unchanged, and the (S-I) schedule will move from (S-I)0 to (S-I)1.
We conclude then that the new income level will ...
Purchase this Solution
Free BrainMass Quizzes
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.