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Assume the following data for the Australian economy (in billion $) in 2022. Answer the questions that follow. Assume I, G and NX are independent of the level of income:

C = 160 + 0.60Y

I = 305

G = 460

NX = +55

Required:

Identify the marginal propensity to consume and calculate the value of the expenditure multiplier.

The marginal propensity to devour is given by the pay coefficient in the utilization work. Here as we can see that the pay coefficient in the utilization work is equivalent to 0.6.

So marginal propensity to devour is equivalent 0.6

= [1 / (1 - MPC)]

= [1 / (1 - 0.60)]

= 1/0.4

= 2.5

So the expenditure multiplier here is equal to 2.5

(ii) At what value of Real GDP does equilibrium exist?

Y = C + I + G + NX

Y = 160 + 0.6Y + 305 + 460 + 55

Y = 980+ 0.6Y

Y - 0.6Y = 980

And (1 - 0.6) = 980

Y(0.4) = 980

Y = 980/0.4

Y = A$2,450 billion

So the equilibrium level of income is equal to A$2,450 billions.

Assume Potential RGDP = $2,525 billion. Does this economy have an inflationary or recessionary gap? What is the value of this gap?

if likely GDP = $2,525 billion,

there is recessionary hole of size $2,525billion - $2,450 billion = $75 billion

iv)If the government decided to change income tax, by how much will the Government need to change taxation and in what direction?

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v) Should the government implement an expansionary or contraction fiscal policy in response? What is the aim of the government's policy stance?

Based on the above data will the government budget for a deficit or surplus in 2022? Explain your answers.

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(vi) During 2020 and 2021 fiscal policy was used / implemented by the Government in response to the economic effects of 'Covid- 19' / Pandemic. With reference to the strengths of fiscal policy identify and briefly explain two reasons for using fiscal policy.

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