Question

very lost help me answer these

4. Suppose that a certain country has an MPC of 0.9 and a real GDP of $400 billion.

If its investment spending decreases by $4 billion, what will be its new level of real GDP?

5. The data in columns 1 and 2 in the table below are for a private closed economy.

GDP	A.E. Private Closed Economy	Exports	Imports	Net Exports	A.E. Private Open Economy
200	240	20	30
250	280	20	30
300	320	20	30
350	360	20	30
400	400	20	30
450	440	20	30
500	480	20	30
550	520	20	30

a. Use columns 1 and 2 to determine the equilibrium GDP for this hypothetical economy.

b. Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in columns 5 and 6 and determine the equilibrium GDP for the open economy. What is the change in equilibrium GDP caused by the addition of net exports?

c. What is the multiplier in this example?

7. Refer to columns 1 and 6 in the table for problem 5. Incorporate government into the table by assuming that it plans to tax and spend $20 billion at each possible level of GDP. Also assume that the tax is a personal tax and that government spending does not induce a shift in the private aggregate expenditures schedule.

What is the change in equilibrium GDP caused by the addition of government?

Answer 1

Answer to Question No. 4

The multiplier K = 1/(1-MPC)

so K = 1/(1-0.69) = 1/0.1 = 10 times

K is also expressed as K = Change in income/Change in investment

so 10 = Change in income/4

Change in income = $40 billion

Answer to Question No. 5

GDP	A.E. Private Closed Economy	Exports	Imports	Net Exports	A.E. Private Open Economy	Remarks	MPC	Multiplier = 1/(1-MPC)
200	240	20	30	-10	230
250	280	20	30	-10	270		0.8	5
300	320	20	30	-10	310		0.8	5
350	360	20	30	-10	350	Equilibrium is reached with AD(Open) = GDP = 350	0.8	5
400	400	20	30	-10	390	Equilibrium is reached with AD(Closed) = GDP=400	0.8	5
450	440	20	30	-10	430		0.8	5
500	480	20	30	-10	470		0.8	5
550	520	20	30	-10	510		0.8	5

Change in GDP by addition of Net Exports is -$50 billion. The new equilibrium GDP has fallen from $400 to $350 billion.

Formulas Used:

AD(closed) = GDP for closed equilibrium, AD(open) = GDP for open equilibrium

MPC = 1/(1-MPC), Net Exports = Exports-Imports