Part A (15 marks) Illustrate using an equation and diagrammatically the flows of money that balance in an open economy with government (G, I, M, S, T, X). Which of these flows are not in balance when an economy is running (a) a balance of payments deficit, and (b) a budget deficit?

Part B (25 marks) With reference to the graph below, explain how an increase in one of the components of Expenditure (E) will affect the level of National Income (Y). What is this effect called and what factors will determine its magnitude?

Part C (60 marks) Based on your understanding from Part B and with reference to appropriate examples, discuss whether an increase in exports will lead to an increase in employment in an economy. (Hint: you might discuss inflationary/deflationary gaps, aggregate demand, supply side factors and types of unemployment in your answer).