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 a decrease in the autonomous investment, the equilibrium income will fall from $50 billion to $40 billion (along the S-I=NX curve) as the decrease in investment will lead to a decrease in aggregate demand. This decrease in income will lead to a decrease in imports and an increase in exports, resulting in a trade surplus. Therefore, the trade account will move to a surplus of $2.5 billion (as shown by the distance between the new equilibrium income and the new intersection of the S-I=NX curve).

Figure 132