Macroeconomics Assignment: Applying Economic Principles and Models

This macroeconomics assignment analyzes various aspects of a given economy. It starts by calculating income levels, tax rates, and marginal propensities. The solution then determines total savings, equilibrium income, and import functions, followed by the calculation of autonomous net exports and planned expenditure. It explores the concept of marginal leakage rates and computes the expenditure multiplier. The assignment further investigates the GDP gap, illustrating it with AD-AS and AE models, and analyzes expansionary fiscal and monetary policies, including the crowding-out effect and the impact on exchange rates. Finally, it examines the economic consequences of changes in exchange rates, including impacts on exports, and concludes with a reference list.

Running head: MACROECONOMICS
Macroeconomics
Name of the Student
Name of the University
Course ID

1MACROECONOMICS
Table of Contents
Section A.........................................................................................................................................2
Part 1............................................................................................................................................2
Part 2............................................................................................................................................3
Part 3............................................................................................................................................3
Part 4............................................................................................................................................4
Part 5............................................................................................................................................5
Part 6............................................................................................................................................6
Part 7............................................................................................................................................6
Part 8............................................................................................................................................6
Part 9............................................................................................................................................7
Section B..........................................................................................................................................8
Part 10..........................................................................................................................................8
Part 11..........................................................................................................................................9
Part 12........................................................................................................................................10
Part 13........................................................................................................................................11
Part 14........................................................................................................................................11
Part 15........................................................................................................................................12
Reference list.................................................................................................................................14

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Section A
Part 1
Income level is given as $450, 179 million.
Income tax rate (MPT) = 28%
Marginal propensity to save (MPS) = 0.4
Marginal propensity to import (MPM) = 0.1
Marginal Propensity ¿ Consume ( MPC )=1−MPS−MPT −MPM
¿ 1−0.4−0.28−0.1
¿ 1−0.78
¿ 0.22
Consumption function
C=a+ bY
C = Consumption
a: Autonomous consumption
b: Marginal Propensity to Consume
Y: Disposable income
C=a+ bY
¿ , 262 ,619.0=a+0.22 ( 450,179−56,700 )

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¿ , 262 ,619.0=a+ ( 0.22×393 , 479 )
¿ , 262,619.0=a+86,565.38
¿ , a=262,619.0−86,565.38
¿ , a=176,053.6
Autonomous consumption is $176,053.6 Million
Part 2
Level of total saving
Saving=Income−Consumption expenditure−Government expenditure
¿ $ 450 , 179−$ 262,619.0−$ 113 , 601.0
¿ $ 73959.0 Million
Part 3
Data related to the economy are as follows
Income level (Y) = $450, 179 million
Consumption Expenditure (C) = $262, 619.0 million
Export expenditure (X) = $99, 804.0 million
Import expenditure (M) = $97, 424.0 million
Formula for equilibrium income is given as
Y =C + I +G+ ( X−M )

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¿ , 450 , 179.0=262,619.0+I +113 , 601.0+ ( 99 , 804−97,424 )
¿ , 450,179.0=262,619.0+ I +113,601.0+380
¿ , 450,179.0=378,666.0+I
¿ , I =71,579.0
Actual Investment for the economy is $71, 579.0 million
Unintended inventory investmment=Actual investment −Planned investment
¿ ( $ 71,579.0−$ 86,227.0 ) Million
¿−$ 14,648.0 Million
Part 4
Import function for the economy is assumed to be of following form
M = A+BY
M: Import expenditure
A: Autonomous import
B: Marginal propensity to import.
Given the import expenditure of $97, 424.0 million, autonomous import can be determined as
M = A+BY
¿ , 97,424.0= A + ( 0.1× 450,179.0 )
¿ , 97,424.0= A +45017.9

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¿ , A=97,424−45 , 017.9
¿ , A=$ 52,406.1 Million
Autonomous import = $52, 406. 1 Million.
Part 5
Net export ( NX ) =c+dY
NX: Net export
c: Autonomous net export
d: Marginal propensity for net export.
Net Export =Export expenditure−Import expenditure
¿ ( $ 99 , 804.0−$ 97 , 424.0 ) Million
¿ $ 2380.0 Million
NX =c +dY
¿ , 2380 .0=c + ( 0.1 × 450,179 )
¿ , 2380 .0=c +45,017.9
¿ , c=2380 .0−45,017.9
¿ , c=−42,637.9
Autonomous net export = - $42, 637. 9 Million.

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Part 6
Autonomous Planned Expenditure
Autonomous consumption+Planned investment + Autonomous net export
¿ ( $ 176053.6+$ 86,227.0−$ 42 , 637. 9 ) Million
¿ $ 219 ,642.7 Million
Part 7
The economy has not reached equilibrium as actual investment is less than planned
investment meaning a negative unintended investment.
Equilibrium Income(Y )=C + I +G+ ( X−M )
¿ 262 , 619.0+ 86 , 227.0+113 ,601.0+ ( 99,804−97 , 424 )
¿ 262,619.0+86,227.0+113,601.0+2380
¿ $ 464 ,827.0 Million
Part 8
Marginal leakage rate=MPS+ MPT +MPM
¿ 0.4+ 0.28+0.1
¿ 0.78
Marginal leakage rate signifies income that exits the economy instead of adding to the
system (Goodwin et al., 2015). Saving, spending on import and part of the economy spent on

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income tax do not add to aggregate expenditure of the economy and therefore represents
marginal leakage rate.
Part 9
Expenditure multiplier of the economy can be computed as
Expenditure Multiplier= 1
Total Leakages
¿ 1
0.78
¿ 1.28
The lump sum and income tax multipliers can be estimated as
Lumpsum tax multipler= −MPC
1−MPC
¿ −0.22
1−0.22
¿ −0.22
0.78
¿−0.28
Income tax multiplier= −1
1−MPC ( 1−t )
¿ −1
1−0.22 ( 1−0.28 )
¿ −1
1− ( 0.22 ×0.72 )

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¿ −1
1−0.1584
¿ −1
0.8416
¿−1.19
Section B
Part 10
GDP gap represents the extent to which equilibrium level of GDP differs from potential
GDP called the natural GDP. The natural level of income is estimated as $490, 000 million. The
obtained equilibrium income for the economy $462, 827 million. As equilibrium level of income
is less than the natural level of income there exists a deflationary gap (Ehnts, 2016). The
magnitude of deflationary gap can be computed as
GDP Gap= ActualGDP−Potential GDP
¿ ( $ 464 ,827−$ 490,000 ) Million
¿−$ 25 ,173 Million

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Figure 1: AD-AS model and GDP gap
Figure 2: AE model and GDP gap
Part 11
Equilibrium level of income is smaller than the natural output. In order to close the gap,
government should increase spending.
Expenditure multiplier of the economy is computed as

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Expenditure Multiplier=1.28
¿ , ΔY
ΔG =1.28
¿ , 25,173
ΔG =1.28
¿ , Δ G=25,173
1.28
¿ , ΔG=19,666.4
Government spending needs to be increased by $19, 666.4 Million to close the GDP gap.
Part 12
Figure 3: Expansionary fiscal policy with crowding out effect
In the process of increase in national income due the expansion of government spending
is in effect through the multiplier process. As income increases, there is an associated increase in

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demand for money. This creates an upward pressure on interest rate. A rise in interest rate in turn
reduces private sector investment. Fall in private investment due to an increase in government
spending is termed as crowding out effect (Brown & Narasimhan, 2019). This in turn reduces
multiplier effect. In the given case, if government expenditure increases by $19,666.4 million, in
the absence of crowding out effect, national income should be ideally increased to Y2. However,
because of crowding out effect income actually increase to Y1.
Part 13
Deflationary gap in an economy is to be closed by lowering interest rate of the economy.
A lower interest rate reduces cost of borrowing funds resulting in an increase in investment. As
investment expands, aggregate demand increases resulting in an increase in income. Central bank
can lower the interest rate through open market operation of purchase of government bonds and
securities. As government purchases bonds and securities money supply increases. The higher
money supply reduces interest rate. The lower interest rate raise investment. Increased
investment increases income and thus helps to close the deflationary GDP gap.
Part 14
Figure 4: Monetary policy and impact on exchange rate