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 changing preferences lead to an autonomous decrease in Australian imports 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 changing preferences lead to an autonomous decrease in Australian imports of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Quizplus · Accepted Answer

With an autonomous decrease in imports of $5 billion, the expenditure function (E0) will shift up by $5 billion. This means that at the initial income level of $50 billion, there will be excess supply in the goods market, leading to a rise in income until it reaches a new equilibrium at $60 billion where (S-I)1 intersects (X-M)1. At this new equilibrium point, there will be a surplus of $2.5 billion in the trade account, as shown by the distance between (X-M)1 and (S-I)1 at the income level of $60 billion.

Figure 132