1. In the context of the covid-19 shock, the Reserve Bank of Australia reduced interest rates in 2020. Using a graph, show how this policy would have affected the optimal borrowing level for consumption today by a household that has a future endowment.

2. Assume that spending in Australia in 2019 can be expressed by the following equations:

C=c0+c11-tY
I=I
G=G
Net X=X-mY

If the Reserve Bank’s policy implemented in 2020 succeeded in increasing autonomous household consumption by $100 billion, calculate the equilibrium level of national income for 2019 before the stimulus and in 2020 after the stimulus showing all your working (you can write the calculations on paper and then attach a photo of your working in this document). Calculate the multiplier and explain the economic reason why it is more than 1. 

Expenditure in Australia, 2019
Autonomous Consumption (c0)	$400 billion
Marginal Propensity to Consume (c1)	0.55
Marginal Tax Rate (t)	0.3
Marginal Propensity to Import (m)	0.05
Government Expenditure (G)	$115 billion
Investment (I)	$200 billion
Exports (X)	$20 billion

Answer rating: 100% (QA)

Answer 1 To reduce the Covid19 shock Reserve Bank will follow policy of expansionary monetary policy ... View the full answer