Macroeconomics: Autonomous Consumption, Planned Expenditure, and Monetary Policy

This article discusses the concepts of autonomous consumption, planned expenditure, and monetary policy in macroeconomics. It covers topics such as calculating autonomous consumption and export expenditure, the expenditure and tax multipliers, and the AD-AS model.

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Macroeconomics
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Economics 2
Macroeconomics
PART A
1. The formula for computing the autonomous consumption will depend on the value of the
Consumption expenditure which is calculated as follows;
CE= Co + MPC (Yd),
And Yd which is the disposable income is calculated as follows;
Y-T-ty
MPC is the Marginal Propensity to Consume (MPC) whereas Autonomous Consumption is the
level of consumption that is not influenced by the income level.
262619 = Co + 0.6 (450179 -56700 -.028(450179),
Where 262619 is the Consumption expenditure, Co is the autonomous consumption, 0.6 is the
marginal propensity to consume (MPC), 56700 is the income level, 0.28 is the marginal
propensity to tax (MPT), and 450179 is the tax level. We can then say that;
262619 = Co + 0.6 (267428.88)
262619 = Co +16457.33
Co = 262619-16457.33 = $102161.7 million
2. Economically, Income is the aggregate Consumption added to saving. Since the value of
consumption is known, we can therefore say that;
S= Y-C

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$ 450179 - $262619
S = $187560.0 million
3. Economically, Income is the aggregate Consumption added to saving. Since the value of
consumption is known, we can therefore say that;
I = Y-C
$ 450179 - $262619
= $187560.0 million
It therefore confirms the economic theory that proves that S=I
4. The value of autonomous export expenditure will not depend on the value of import made
locally, thus it is calculated as follows;
IE = Io + MPI(Y-T-ty)
Where Io is the autonomous import expenditure, MPE is the marginal propensity to Import, and
Yd = Y-T-ty
97424 = Io +0.1 (267428.88)
Io = 97424 -26742.89
=$70681.10 millions
5. The value of Net Export, NX is calculated as;
NX =Export –Import

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Mo +MPI(Y-T-ty)
The value of Net Export is therefore calculated as;
99804.0 -97424 = 2380
Mo = NX + MPI(Y-T-ty)
= 2380+0.1 (267428.88)
Mo = $ 29122.90 million
6. Planned Expenditure is the total expenditure that the government is able to plan within its
attainable budget. It is therefore calculated as follows;
PE= Eo + MPC(Y-T-ty) +I +G +NX
Eo = 450179 – {0.6(267428.88) +70681.10 +113601.0 +2380)
450179-347119.428
Autonomous Planned Expenditure =$103059.60
7. No. This is because the level of Equilibrium is calculated as;
Y= C +I +G +NX
Where C = 103059.60, I= 86227, and NX =2380, thus;
Y= 103059.60+ 86227 + 113601 + 2380
Y = $ 305267.60 million which is less than the given Y = $450179

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8. The value of Marginal Leakage Rage is the value of national income that is taxed or
saved and it is calculated as follows;
= MPS (1-MPT) + MPT +MPI
Where;
MPS is the Marginal Propensity to Save, MPI is the Marginal Propensity to invest, and MPT is
the Marginal Propensity to Tax.
MLR = 0.4 (1-0.28) +0.28 +0.1
= 0.67
The able value shows that about 67 percent of the National Income saved instead of consumed in
the economy. As a result, since 67% is greater than the remaining position which is 33%, the
economy is therefore regarded to be in a stable state.
9.
a. Expenditure multiplier
MPC= 0.6, t=MPT=0.28, and nx= 0.1 is the MPI
1
{( 1−c ) +ct+nx } = 1
{( 1−0.6 ) +0.6∗0.28+0.1 } =1.50
b. Tax multiplier
−c
{( 1−c ) +ct+nx = −0.6
{( 1−0.6 ) +0.6∗0.28+0.1 } =-0.90

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PART B
10. For an economy to be in a short run the level of Aggregate demand must equate its output
supply so as not to experience a deficit or surplus. In the short run, Aggregate Demand
intersect the SRAS where equilibrium point is generated at a point where price (P) is
equal to output (Q) using the AD-AS model. This can be explained using the following
AD-AS model below;
Figure 1.0: An AD-AS model
As a result, since there will be inadequate utilization of the resources, the economy experience
GDP gap which is the gap between possible GDP achievable and the real GDP. The GDP gap
will therefore be experienced in a situation where there is space between AD-AS model and the
GDP.

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Given that $490000 million is greater than $469636.70; there will be a deflationary gap due to
underutilization of the available resources leading to a decline economic growth and
development.
11. Since there is underutilization of the available resources, the differences between the
potentially achievable GDP and real will be calculated as follows;
$490000 million - $469636.7 million =$ 20363.3 million
Keynesian model therefore postulated that to help regulate the inflationary gap, there should be
contractionary fiscal policy in terms of tax increment and or reduction in the general government
expenditure. As a result, AD curve will shift to the left side due to res GDP reduction. It will
therefore accelerate the level of national output.
12. Contractionary fiscal policy induces the government to reduce its spending while at the
same time increasing tax level. Crowding out effect will lead to a shift in the supply side
curve of the bond to the right. This will lead to a reduction in the interest rate leading to a
positive rate of investment in the economy. As a result, the dollar supply (money supply)
in the economy will reduce thus leading to low exchange rate level with accelerated Net
Export. On the other hand, increase in taxes on private investment leads to low disposable
income thus reduces multiplier effect on the GDP level.
13. The level of money supply is implicitly controlled by the Central Bank using the
monetary policy tools. Macroeconomic variables including employment, consumption
level, inflation, and inflation rate are majorly influenced by the level of money supply in
an economy. To control these macroeconomic variables, Central Bank will use
expansionary monetary policy where it buy and sell the treasury bonds from the economy

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using the Open Market Operations. When Central Bank buys the treasury bonds from the
market, it reduces the level of interest rate on the credit provided by the commercial
banks. As a result, the government through the Central bank will use the expansionary
monetary policy type of OMO thus leading to a downward shift in the interest rate level.
14. Assuming that AUD is traded in the monetary market against the Sterling Pound, then it
will be clear using the figure below expansionary monetary policy will result in reduction
in the level of interest rate. As a result, foreign investors in the Australia economy will be
discouraged from buying assets locally. In the long run, the investors will be forced to
exchange the local currency, AUD in order to finance the increasing prices of local
assets. It will therefore lead to a depreciation of the Australian dollar in the exchange
market.
Figure 2.0: AUD Exchange rate against Sterling Pound
From figure 3.0 above, when there is a reduction in bond price in the Australian market, then
there will be depreciation for the AUD in the exchange rate market from Q1 to Q2 compared to

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the Sterling Pound. The new equilibrium will be at E2 where the level of AUD shall have
depreciated to an equilibrium level P2 =Q2. The implication on the depreciation for the AUD in
the exchange rate market is that the export goods will increase at a lower price while the import
level decreases thus leading to imbalance Net Export level.
15. A decrease in the exchange rate due to low interest rate brought about by the expansionary
monetary policy will lead stable Net Export since level of Export will surpass the level of
import. As a result, economy will be promoting the Export Strategies which increases the
output level both in infant industries. This will result in job creation thus leading to reduction
in the unemployment rate in the economy. As a result, the level of output will increase due to
increased consumption and as a result, earning the government revenue due to reduction in
the level of interest rate as per figure 3.0 below;
Figure 3.0: IS-LM Model explaining economy and unemployment status

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Reduction in the level of interest rate from the equilibrium point A to point A* will result in
to a multiplier and accelerator effect on economy. As a result of the deduction in the interest
rate, exchange rate reduced and therefore causing an increase in the value of export.