Figure 13.2.Australian Economy Under a Fixed Exchange Rate System

-Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S-I)0 intersects (X-M)0,suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Question

Figure 13.2.Australian Economy Under a Fixed Exchange Rate System
 
-Refer to Figure 13.2.Starting at equilibrium income $50 billion,where (S-I)0 intersects (X-M)0,suppose that worsening profit expectations lead to an autonomous decrease in Australian investment of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Quizplus · Accepted Answer

With an autonomous decrease in investment of $5 billion, the aggregate demand (AD) curve shifts leftward. This leads to a decrease in income from $50 billion to $40 billion where the new intersection of (S-I) and (X-M) occurs. As the decrease in investment has not affected the trade balance, the (X-M) curve remains unchanged. Thus, at the new equilibrium income of $40 billion, there is an excess supply of goods and services, leading to a surplus in the trade account of $2.5 billion (where exports exceed imports by $2.5 billion). Therefore, the correct answer is C.

Figure 132