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 increased thriftiness leads to an autonomous increase in Australian saving 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 increased thriftiness leads to an autonomous increase in Australian saving of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Quizplus · Accepted Answer

Increased thriftiness leads to an increase in saving which results in (S-I)1 moving to the right by $5 billion. This causes an increase in equilibrium saving to $55 billion. The new equilibrium point is at the intersection of (S-I)1 and (X-M)0 where income is $40 billion. At the new equilibrium, there is a surplus in the trade account of $2.5 billion. Therefore, the correct answer is C.

Figure 132