Macroeconomics: Expenditure, Fiscal, and Monetary Policy Analysis

This economics assignment analyzes a macroeconomic model, calculating autonomous consumption, taxation, investment, and net exports. It determines equilibrium income and illustrates the economy using the aggregate expenditure model. The assignment further explores the GDP gap using the AD-AS and AE models, calculating changes in government spending and taxation needed to close the gap. It then examines the effects of monetary policy, including interest rate adjustments and open market operations, on exchange rates and the economy using the exchange rate market model and the IS-LM model, considering the impact on unemployment. The solution provides detailed calculations and explanations of key macroeconomic concepts and models.

Consider an economy with the following data:
Consumption expenditure = $171,701.1 million
Planned investment = $119,020.5 million
Government expenditure = $48,621.7 million
Export expenditure = $840,223.9 million
Import expenditure = $720,695.8 million
Autonomous taxes = $206,700.0 million
Income tax rate = 17.5%
Marginal propensity to save = 0.42
Marginal propensity to import = 0.08
Section A
Part (1)
Calculate the level of autonomous consumption when the level of income
equals $466,312.6 million (solve to one decimal point).
Autonomous expenditure
MPS (Mariginal propensity to
save ) 0.42
MPC 1-MPS 0.58
Consumption function (C) c+0.58Y
Where,
Y Level of income
c(Automomous consumption) Automomous consumption
Y = C+I
466312.6 = C+0.58(466312.6)+119,020.5
466312.6 = C+270461.3+119,020.5
466312.6 = C+389481.8
c= 466312.6-389481.8
c= 76831
Part (2)
Calculate the level of total taxation when the level of income equals
$466,312.6 million (solve to one decimal point).
Income 466312.6
Tax rate 17.50%

Level of taxation 466313*17.50% 81604.7
Part (3)
Calculate the level of actual investment when income is equal to
$466,312.6 million and the unintended inventory investment (solve to one
decimal point).
Y= C+Ip+G
466313 = 171701+Ip+48622
466313 = 220323+Ip
Ip = 466312.6-220323
Ip = 245989.6
Actual investment
Planned Investments (I) + Unplanned
investments (Ip)
119020.5+245989.6
Actual investment 365010.1
Part (4)
Calculate autonomous imports when income is equal to $466,312.6 million
(solve to one decimal point).
Autonomous Import (M) 0+MPM(Y)
0+0.08(466312.6)
Autonomous Import (M) 37305
Part (5)
Calculate autonomous net exports (solve to one decimal points).
Autonomous net exports
Exports-Autonomus imports 840223.9-37305.0
802918.9
Part (6)
Calculate autonomous planned expenditure (solve to one decimal point).

Autonomous spending (Eo)
Eo = C+I+G+NX
Eo = 458871.3
Where,
NX Net exports
NX= X-M
840223.9-720695.8
119528.1
Part (7)
Is this economy in equilibrium when income equals $466,312.6 million? If
not, what is the equilibrium level of income for this economy? (solve to
one decimal point).
Y= C+I+G
171701.1+119020.5+48621.7
339343.3
Part (8)
Illustrate this economy using the aggregate expenditure model. On your
diagram, identify the equilibrium level of income as calculated in part 7
and the actual level of income ($466,312.6 million). Identify the vertical
distance that represents unplanned inventory investment calculated in
part 3.
Ensure you label all axis and each component (line) you draw in your
diagram.
According to this model, explain how this economy will move to the
equilibrium level of income. (100-word limit)
In accordance to aggregate expenditure model, equilibrium is stated
as the point where an aggregate expenditure and the supply curve
intersects. A rise in an expenditure by the consumption or an investment
causes an aggregate expenditure rises which pushes an economy towards
higher level of equilibrium.

Part (9)
Calculate the expenditure and tax multipliers for the economy (solve to
two decimal points).
Spending multiplier: 1 / MPS
= 1 / 0.42
= 2.38
Tax multiplier:
= - 0.08 / 0.42
= 0.19
Section B
Assume that your economy is now operating at the equilibrium
level in the short-run as calculated in part (7).
Part (10)
Illustrate the GDP gap using the AD-AS Model and the AE Model, if the
natural level of income is estimated as $450,000 million.
Potential output 450000
Actual output 339343.3
GDP gap (as per AE model) GDPpotential – GDPactual 110656.7
Part (11)
If the government wants to close the existing GDP gap, calculate the
change in spending that would have to be undertaken - specify whether
this will be an increase or decrease in spending. (solve to one decimal
point)
Change in income / Change in government
expenditure 1/1-MPC
110656.7/ change in government
expenditure 1/1-0.58
110656.7/Change in G 1/0.42

Change in G= 110656.7*0.42
Change in G= 46475.8
From the above results it has been interpreted that pound 46475.8
of increase in the government expenditure would be closing a
recessionary gap of pound 110656.7.
Part (12)
If the government decides to close the existing GDP gap using taxation
policy, calculate the change in autonomous taxes required to close the
gap - specify whether this an increase or decrease in autonomous
taxation. (solve to one decimal point)
Change in Y/Change in T = -m/1- m
110656/change in T -0.58/1-0.58
110656/change in T -0.58 / 0.42
-0.58/Change in T 46475.8
Change in T= 46475.8/-0.58
Change in T= -80130.7
The above analysis reflects that the amount of taxes decreases with
pound 80130.7 with a recessionary gap of valuing 110656.7.
Part (13)
Assume the central bank decides to move and close the GDP gap instead
of fiscal policy.
In what direction will interest rates have to move to close the GDP gap
and what type of open market operation will the central bank undertake?
Specifically at times of recession, an actual GSP drops below the potential that
creates a negative level of an output gap. This below potential performance might spur
central bank in adopting the moetary policuy rather than fiscal policy for stimulating growth
in an economy by way of lowering down the interest rates. On the other side, In boom
period. GDP rises above the potential level and results a positive gap that in turn reflects
upwards pressure on the inflation and induces central bank in cooling down the economy by
increasing interest rates.
Part (14)
Using the exchange rate market model, illustrate and explain how the
monetary policy action identified in part (13) may affect the exchange
rate. Identify the new equilibrium on the diagram as point B. (100-word
limit)
Monetary policy has a direct impact on an excahge rate in terms of
price changes, income changes and an interest rates. These factors
lowers down the value of the dollar and decreases an exchange rate as
more and more people exchanges or demand the foreign currencies in
paying for the goods. Monetary policy appers to affect an exchange rate in

such a direction in time of the turbulence. Although this policy apperas as
capable in stabilizing an excahnge rate even in times of teh tubulence,
often the central banks ends up partly in accomodating the exchange
market related pressure.
Part (15)
Using the IS-LM model, illustrate and explain how the economy and the
unemployment may be impacted as a result of the change in the
exchange rate in part (14). Identify the new equilibrium on the diagram as
point B. (100-word limit)
In accordance to this model, it has been indicated that due to the
change in an exchange rates, unemployment and overall economy is
highly affected. Increase in the currency exchange rate depicts growth in
an economy because teh disposable income of the people increases and
this in tur reduces the rate of unemployment. On the other state,
decrease or decline in currency rate, the GDP of the country gets affected
to a large extent which impacts or influences an entire economy and the
rate of unemployment would be seen as the major concern for a country.