Question: question 5 6 marks total a suppose that real gdp...
Question 5 [6 marks total]
(a) Suppose that real GDP for an economy is currently $13.1 trillion, potential GDP is $13.5 trillion, the government purchases multiplier is 2 and the tax multiplier is –1.6. Answer the following (show your workings out)
(i) Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP? [1 mark]
(ii) Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP? [1 mark]
(iii) Construct an example of a combination of increased government spending and tax cuts that will bring the economy to equilibrium at potential GDP.
(b) If you know that a country’s net foreign investment is positive, what does that tell you about the relationship between the country’s national saving and private investment? [2 marks]
(c) Let’s assume that Australia has been running a current account deficit every year. What must then be true about Australia’s financial account balance?