In the context of a Keynesian open-economy income model for a country, carefully explain the impact of each of the following autonomous events upon equilibrium income in the country and upon the country's current account balance:
(a) an increase in domestic investment;
(b) an increase in exports; and
(c) a simultaneous and equal autonomous increase in exports and imports.

Question

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The Answer is In a Keynesian open-economy income model, equilibrium income is determined by the intersection of the aggregate expenditure (AE) and aggregate output (Y) in the economy. The current account balance is the difference between a country's savings and its investment, including both trade in goods and services and financial transactions.

(a) An increase in domestic investment:
When there is an increase in domestic investment, it leads to an increase in aggregate expenditure (AE) in the economy. This increase in AE will shift the AE curve upward, leading to an increase in equilibrium income. As a result, the country's income level will rise, leading to higher levels of output and employment. However, this increase in domestic investment may also lead to a trade deficit, as the higher level of investment may require the country to import more capital goods, leading to a decrease in the current account balance.

(b) An increase in exports:
An increase in exports will lead to an increase in net exports, which will shift the AE curve upward, leading to an increase in equilibrium income. This increase in income will lead to higher levels of output and employment in the country. Additionally, the increase in exports will lead to a higher current account balance, as the country is selling more goods and services to other countries.

(c) A simultaneous and equal autonomous increase in exports and imports:
If there is a simultaneous and equal autonomous increase in exports and imports, the impact on equilibrium income will depend on the relative magnitude of the increase. If the increase in exports is greater than the increase in imports, then the net exports will increase, leading to an upward shift in the AE curve and an increase in equilibrium income. However, if the increase in imports is greater than the increase in exports, then the net exports will decrease, leading to a downward shift in the AE curve and a decrease in equilibrium income. The impact on the current account balance will also depend on the relative magnitude of the increase in exports and imports. If the increase in exports is greater than the increase in imports, then the current account balance will increase. Conversely, if the increase in imports is greater than the increase in exports, then the current account balance will decrease.

In conclusion, an increase in domestic investment and exports will lead to an increase in equilibrium income, while a simultaneous and equal autonomous increase in exports and imports will depend on the relative magnitude of the increase. Additionally, the impact on the current account balance will depend on the relative magnitude of the changes in exports and imports.

In the Context of a Keynesian Open-Economy Income Model for a Country