Suppose a U.S. car maker produces 10 cars, each worth $25,000. During a recession that year,...
Suppose a U.S. car maker produces 10 cars, each worth $25,000. During a recession that year, U.S. households buy only 5 cars. However, the company exports two more cars to Japan. How much does U.S. GDP increase by?
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a. U.S. GDP does not change at all because the car maker is not able to sell all cars |
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b. $125,000 |
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c. $175,000 |
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d. $250,000 |
Homework Answers
Correct option is (d).
Consumption expenditure will increase by ($25,000 x 5) = $125,000.
Net exports (= exports - Imports) will increase by ($25,000 x 2) = $50,000.
Gross domestic private investment (Change in Inventory) will increase by [$25,000 x (10 - 5 - 2) = $25,000 x 3] = $75,000.
Total increase in GDP = Increase in Consumption + Increase in Investment + Increase in Net exports
= $(125,000 + 75,000 + 50,000)
= $250,000
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