Question

17. Consider the following table showing national income in billions of dollars. Assume that the marginal propensity to import is 15% and the level of exports is $60 billion. a. Calculate the level of net exports for each level of actual income and fill in the table below. (Round your responses to the nearest whole number.) Real GDP (Y) (Billions of S) 200 400 Net Exports (X-IM) (Billions of S) 600 800 1000 b. Now assume that the marginal propensity to import increases to 20%. For a given level of exports, the higher the marginal propensity to import, the higher the/lower the/same) level of net exports will be at each level of income. 18. Suppose that in an open economy the level of exports is $60 billion and the marginal propensity to import is 30%. The net exports function in this economy can be written as: Net Exports = $ billion Y. Round your response for the slope term to two decimal places and for the intercept term to the nearest whole number.

Answer 1

(17) Marginal propensity to import = 15%

(Change in Import / Change in Y) = 15%

In the given table, Y is increases by $200 billion every time.

(Change in Import / $200 billion) =0.15

Change in Import = (0.15) ($200 billion)

Change in import = $30 billion.

So, every $200 billion increase in Y leads to increase in Import by $30 billion.  

Real GDP (Y) (Billions of $)	Export (X, Billions of $)	Import (im, Billions of $)	Net export (X - IM)
200	60	30	30
400	60	60	0
600	60	90	-30
800	60	120	-60
1000	60	150	-90

(b) Now suppose marginal propensity to import is 20%. It means every $200 billion increase in Y leads to increase in import by $40 billion.

Real GDP (Y) (Billions of $)	Export (X, Billions of $)	Import (im, Billions of $)	Net export (X - IM)
200	60	40	20
400	60	80	-20
600	60	120	-60
800	60	160	-100
1000	60	200	-140

For a given level of exports, the higher the marginal propensity to import, the lower level of net exports will be at each level of income.

(18) Export = $60 billions.

Marginal propensity to import (MPI) = 30% = 0.3

Hence, Import = 0.3Y

Net export =Export - Import

Net export = $60 billions - 0.3Y.