1) A reduction on the NPI deficit causes a fall in the supply of $A (and thus depreciation) because a smaller NPI deficit requires less $A to service the inflows from the f.account that exit as outflows on the NPI -> So basically, a lower NPI deficit means that Australians reduce the amount of currency they SUPPLY on the FOREX market to meet the servicing commitments
2) You need to work out the multiplier so that you can determine the equilibirum level of income, since the new equilibrium level of income for year 3 will be determined by 300 + 40(K)
In order to do this, calculate the MPC (since they've given you consumption and income you do this by determining the change in consumption divided by the change in income):
90(change in consumption over two years) DIVIDED by 150 (Change in income over two years) = 0.6
So if the MPC is 0.6, you know that the MPS is 0.4 and you can now calculate K
K = 1/ MPS
K = 1/ 0.4
K = 2.5
Equilibrium income for year 3 = 300 + 40(K)
= 300 +100
= 400
3. Borrowing from the RBA is more likely to result in inflation since this form of financing involves printing money without a proportional increase in output of g&s. Since according to the quantity theory of money, inflation is caused when money supply increases without a proportional increase in output, and this form of financing expansionary fiscal policy involves the RBA purchasing T.Bonds without any increase in output, it will cause inflation.
