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)? intersects (X-M)?,suppose that improving profit expectations lead to an autonomous increase 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)? intersects (X-M)?,suppose that improving profit expectations lead to an autonomous increase in Australian investment of $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.

Quizplus · Accepted Answer

An autonomous increase in investment of $5 billion will shift the S-I curve to the left. This will increase income by a multiple of the initial autonomous investment, which is $5 billion. Using the income-expenditure model, income will rise to $60 billion ($50 billion + $5 billion autonomous investment + $5 billion × multiplier). As income rises, imports will increase, shifting the M curve upward. However, the increase in income also leads to an increase in exports due to the higher demand for Australian goods and services, shifting the X curve upward. Since the increase in exports is relatively larger than the increase in imports, there will be a deficit, but a smaller one than before, which is $2.5 billion. Therefore, the correct answer is A.

Figure 132