Question

The data in the first two columns below are for a closed economy. Use this table to answer the following questions. Real GDP Aggregate Net Ageregate = DI Expenditures Exports Imports Exports Expenditures (billions) (billions) (billions) (billions) (billions) (billions) 450 510 Number Number Number Number Number Number Number Number Number Number 5085 Number Number (a) What is the equilibrium GDP for the closed economy? Number (b) What is the size of the multiplier in the closed economy? Number (c) Including the international trade figures for exports and imports, calculate net exports and determine the equilibrium GDP for an open economy. Number (d) What is the equilibrium GDP if exports were $25 billion larger at each level of GDP? Number (e) What is the size of the multiplier in the open economy? Number Assume that investment, net exports, government expenditures, and taxes do not change with changes in real GDP and the MPC is 0.47. (f) Suppose government spending increases by 20 billion. What will be the change in the real GDP? Number (g) Suppose that instead lump-sum taxes increase by 20 billion. What will be the change in the real GDP? Click for List by Number

Answer 1

(a)

In equilibrium, Real GDP = AE = $600 billion

(b)

Multiplier = Change in Real GDP / Change in AE = (500 - 450) / (540 - 510) = 50/30 = 1.67

(c)

Net exports (NX) = Exports (X) - Import (M)

AE(Opre) = AE(Closed) + NX

Real GDP	AE(Closed)	X	M	NX	AE(Open)
450	510	50	60	-10	500
500	540	50	65	-15	525
550	570	50	70	-20	550
600	600	50	75	-25	575
650	630	50	80	-30	600
700	660	50	85	-35	625

In equilibrium, Real GDP = AE(Open) = $550 billion

(d)

New exports = 50 + 25 = $75 billion

Real GDP	AE(Closed)	X	M	NX	AE(Open)
450	510	75	60	15	525
500	540	75	65	10	550
550	570	75	70	5	575
600	600	75	75	0	600
650	630	75	80	-5	625
700	660	75	85	-10	650

In equilibrium, Real GDP = AE(Open) = $600 billion

NOTE: As HOMEWORKLIB's Policy, only 1st 4 parts are answered.