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 dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.
A) Rises to $60 billion, deficit of $2.5 billion
B) Rises to $60 billion, deficit of $5 billion
C) Falls to $40 billion, surplus of $2.5 billion
D) Falls to $40 billion, surplus of $5 billion

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 dwindling thriftiness leads to an autonomous decrease in Australian saving to $5 billion.Australian income thus ____ which leads to Australia's trade account moving to a ____.
A) Rises to $60 billion, deficit of $2.5 billion 
B) Rises to $60 billion, deficit of $5 billion 
C) Falls to $40 billion, surplus of $2.5 billion 
D) Falls to $40 billion, surplus of $5 billion

Quizplus · Accepted Answer

The autonomous decrease in saving leads to a decrease in the S-I curve. This means that at any given level of income, there is now less saving and more investment. This leads to an increase in aggregate demand and thus an increase in income. The increase in income leads to an increase in imports and a decrease in exports, which leads to a trade deficit.

Figure 132