TUTORIAL 4: Week 5 Solutions. (Chapter 9: Aggregate Expenditure (AE) model -Sections 9.1-9.3 ) Qu. 1 (a)What are the main determinants of consumption spending? Which of these is the most important? ANSWER:The main determinants of consumption spending are current disposable income, household wealth, expected future income, consumer confidence and the interest rate. The most important determinant is current disposable income. (b)What are the four main determinants of investment? How would a change in interest rates affect investment? ANSWER:The four main determinants of investment spending are expectations of future profitability, the interest rate, business confidence, business taxes and cash flow. An increase in the interest rate would decrease investment spending and a decrease in the interest rate would increase investment spending. (c) What are the three main determinants of net exports? How would an increase in the growth rate of GDP in India and China affect Australian net exports? ANSWER:The three main determinants of net exports are the price level in Australia relative to the price level in other countries, the growth rate of GDP in Australia relative to the growth rate of GDP in other countries, and the exchange rate between the Australian dollar and other currencies. An increase in the growth rate of GDP in India and China, relative to the growth rate of GDP in Australia, would increase Australian net exports. Qu. 2Fill in the missing values in the following table. Assume that the value of theMPC does not change as real GDP changes. a.What is the value of theMPC? b.What is the value of equilibrium real GDP?
