Not So Simple Multiplier! Help. (1 Viewer)

[kapitanvicki]

Please detail the step-by-step solutions because chances are my sleep-deprived brain will not compute anything from newton's law to 1+1 today!

Can you also help me with the other question? I'm not an 80% sure on that one.

Thank you!

It will not let me upload the questions so here goes:

1. The table shows selected data for an economy.
Year 1: Y=400m; C=100m
Year 2: Y=500m; C=150m
Year 3: Y=600m; C=200m
Year 4: Y=?; C=300m
What would be the new equilibrium level of income (Y) in Year 4, if consumption (C) in this economy increases to $300m in Year 4 and the MPC remains constant?
(A)$200 m
(B)$600 m
(C)$700 m
(D)$800 m


2. Which of the following is most likely to occur when the Australian government finances a budget deficit by borrowing from overseas?
(A)Domestic interest rates will rise.
(B)The money supply will decrease.
(C)The current account deficit will rise.
(D)The Australian dollar will depreciate.

 

[random-1006]

Please detail the step-by-step solutions because chances are my sleep-deprived brain will not compute anything from newton's law to 1+1 today!

Can you also help me with the other question? I'm not an 80% sure on that one.

Thank you!

It will not let me upload the questions so here goes:

1. The table shows selected data for an economy.
Year 1: Y=400m; C=100m
Year 2: Y=500m; C=150m
Year 3: Y=600m; C=200m
Year 4: Y=?; C=300m
What would be the new equilibrium level of income (Y) in Year 4, if consumption (C) in this economy increases to $300m in Year 4 and the MPC remains constant?
(A)$200 m
(B)$600 m
(C)$700 m
(D)$800 m


2. Which of the following is most likely to occur when the Australian government finances a budget deficit by borrowing from overseas?
(A)Domestic interest rates will rise.
(B)The money supply will decrease.
(C)The current account deficit will rise.
(D)The Australian dollar will depreciate.

1. MPC = change consumption/ change in income { pick any of the years}
MPC= 50/100= 0.5 = ie half of the all the extra income will be spent. Now if we spent an extra $100, that means we earnt an extra $200, 600 + 200= answer.

2. Key word, from overseas, we are bringing in all this extra money on the capital and financial accounts, and this debt is serviced on the current account. REMEMBER, serviced on the current account ( ie interest is paided on current account), but the lump sum repayments are made on the cap/ financial accounts. ANSWER= C

 

[kapitanvicki]

1. MPC = change consumption/ change in income { pick any of the years}
MPC= 50/100= 0.5 = ie half of the all the extra income will be spent. Now if we spent an extra $100, that means we earnt an extra $200, 600 + 200= answer.

2. Key word, from overseas, we are bringing in all this extra money on the capital and financial accounts, and this debt is serviced on the current account. REMEMBER, serviced on the current account ( ie interest is paided on current account), but the lump sum repayments are made on the cap/ financial accounts. ANSWER= C

Thanks. But I'm now even more confused about question 2. What does 'lump sum repayment' mean specifically? Looking again at another question (which I got incorrect... pfft)

How are the foreign company dividends paid to Australian investors recorded on Australia’s Balance of Payments?
(A)As a debit on the current account
(B)As a credit on the current account
(C)As a debit on the capital and financial account
(D)As a credit on the capital and financial account

Wouldn't dividend be part of the capital and financial account, not the current account?

 

[random-1006]

Thanks. But I'm now even more confused about question 2. What does 'lump sum repayment' mean specifically? Looking again at another question (which I got incorrect... pfft)

How are the foreign company dividends paid to Australian investors recorded on Australia’s Balance of Payments?
(A)As a debit on the current account
(B)As a credit on the current account
(C)As a debit on the capital and financial account
(D)As a credit on the capital and financial account

Wouldn't dividend be part of the capital and financial account, not the current account?

ok, with the lump sum bit , i mean, say you went to a bank and borrowed say $500 000, now, you would have to repay the initial $500 000, plus the interest. If we sort of move this analogy into global terms, the $500 000, the amount of money you actually borrowed would be paided back on the financial account, whereas the interest on the $500 000 will be paided back on the current account.


Now for the next question what do we have " foreign company paids dividend to australian investor" , so money is coming into our economy, so its a credit and you must know your balance of payments better

Current Account :

Balance on goods and services (consisting of) :

-Imports ( important, imports have a negative value, as money is LEAVING our economy, some past exams have this trick)
-Exports
-Services

Incomes:
- Interest
- Profit
- Dividends
- Rent

Current transfer:
- aid of non capital nature ( e.g. welfare payments )

Capital Account:
- intellectual property rights ( patents etc)
- migrant money
- aid of capital nature ( e.g. donated money for building bridge in developing nation)

Financial Account:
- Foreign Direct Investment
- Portfolio Investment
- Reserve Assests
- Other Assests

so............... to conclude

it is a credit ( as money comes into economy) on the current account

 

[24 carrot gold]

I agree with random-1006's answers for both 1 and 2. I'll just try and explain it differently.

When the government borrows from overseas, this is recorded on the capital and financial account as a credit (since it is an inflow of funds into the Australian economy).

However eventually, this overseas loan needs to be repaid to overseas lenders. This outflow of funds is recorded as a debit on the current account.
I think by 'lump sum repayment' random-1006 is talking about the initial loan + the interest incurred. Since the 'lump sum repayment' (outflow) is greater than the initial inflow of funds into the Australian economy, the current account deficit will rise.