RMIT

ECON1045
Macroeconomics Assignment II

Section A

1. s=0.42
c=1−0.42=0.58

C=Ca+(Y −T )
C=Ca+c [Y −(Ta+tY )]
C=Ca+cY – cTa – ctY
Ca=C – cY + cTa+ ctY
Ca=¿ $171,701.1 – 0.58($466,312.6) + 0.58($206,700) + 0.58(0.175)
($466,312.6)
Ca=¿ $68,456.5209m
 $68,456.5m (1dp)

2. T =Ta+ tY
T =¿ $206,700 + 0.175($466,312.6)
T =¿ $288,304.705m
 $288,304.7m (1dp)

3. Y =C + Ia+G+ X−M
Ia=Y −C−G−X + M
Ia=¿$466,312.6 - $171,701.1 - $48,621.7 - $840,223.9 + $720,695.8
¿$126,461.7m

Ia=Ip+ Iu
Iu=Ia−Ip
Iu=¿ $126,461.7-119,020.5
= $7,441.2m (1dp)

4. M =Ma+ nxY
Ma=M −nxY
Ma=¿ $720,695.8 – (0.08) ($466,312.6)
= $683,390.792m
 $683,390.8m (1dp)

5. NXa=Xa−Ma
NXa=¿ $840,223.9 - $683,390.792
= $156,833.108m
 $156,833.1m (1dp)

6. Ap=Ca−cTa+ Ip +G+ Xa−Ma

 Ap=Ca−cTa+ Ip +G+ NXa
Ap=¿ $68,456.5209 – 0.58($206,700) + $119,020.5 + $48,621.7 +
$156,833.108
= $273,045.8289m
 $273,045.8m (1dp)

7. The economy is not ∈equilibrium as Iu=$ 7,441.2m

1
At equilibrium, Y =k 0 ⋅ Ap where k 0=
1−c (1−t )+ nx
1
k 0=
1−c (1−t )+ nx
1
k 0=¿
1−0.58 ( 1−0.175 )+ 0.08
¿ 1.662510391

Ap=$273,045.8289m
Y =k o ⋅ Ap
Y =¿ 1.662510391*$273,045.8289
¿ $453,941.5277
 $453,941.5 (1dp)

8.

Economy is in equilibrium when aggregate expenditure is equal to output, and

Iu=0.
¿
Based on what we calculated above, Y ( $ 466,312.6 m )> Y ( $ 453,941.5 ), and there
is an unplanned investment of $7,441.2m, whereby the output is greater than the
desired expenditure and there are unsold inventories. Therefore, the economy is
not in equilibrium.
Business firms will then adjust their production until unplanned investment is
eliminated. Firms will decrease their output and hence income will fall.
Y will then move towards Y ¿ where aggregate expenditure is equal to output and
the economy is at equilibrium.
 Word count: 91

1
9. k 0=
1−c (1−t )+ nx
1
¿
1−0.58 ( 1−0.175 ) + 0.08
= 1.66251
 1.66 (2dp)

−c
k t=
1−c ( 1−t ) +nx
0.58
¿−
1−0.58 ( 1−0.175 ) +0.08
= -0.96426
 -0.96 (2dp)
Section B

10.
11. Y >Y f
Y =Y −Y f
Y =¿ $453,941.5277 - $450,000
= $3,941.5277

Y =k 0 ⋅G
Y
G=
k0

$ 3,941.5277
G=
1.66251
= $2,370.829469
 $2,370.8m (1dp)

Therefore, for the government to close the existing inflationary GDP gap, there
must be a decrease in government spending of $2,370.8m.

12. Y =k t ⋅Ta
Y
Ta=
kt
$ 3,941.5277
Ta=
−0.96426
= -$4,087.619211
 -$4,087.6m (1dp)

Therefore, for the government to close the existing inflationary GDP gap using
taxation policy, there must be an increase in tax by $4,087.6m.

13. Central bank can adopt contractionary monetary policy to close the inflationary
gap. When the economy is under inflationary pressure, the central bank sells
bonds to the public to control the money supply. This market tool is called Open
Market Operations (“OMOs”). By doing so, it will decrease the money supply in
the market and hence interest rate will increase.

14.
 When Central Bank sells bonds to the free market, it pulls out money out of the
money market to decrease the money supply ( M s ↓¿ . It will lead to an increase in
interest rates (i↑ ¿. An increase in interest rates then decreases investment (I ↓ ¿
as there are lesser borrowings.
However, when the interest rate is higher than foreign interest rate (i>i f ¿,
capital inflow increases and therefore as we can see from the graph above,
demand increases and currency appreciates. ( D AVD ↑)  ( AVD appreciates ¿.

Word count: 82

15.

The appreciation of AVD will result in a decrease in exports to foreign sector and
increase in imports and thus a decrease in net exports. (NX ↓ ¿
As we can see from the model above, RGDP decreases (Y 0 →Y 1 ¿ because of the
decrease in net exports and the new equilibrium changes from point A to point B.
Okun’s law states that there is an inverse relationship between the output and
unemployment. Hence, the drop in output causes unemployment to rise (u ↑).

Word count: 79