Question

The data in columns 1 and 2 in the table below are for a private closed economy Instructions: For all parts, enter your answers as whole numbers. If you are entering any negative numbers be sure to include a negative sign () in front of those numbers. a. Use columns 1 and 2 to determine the equilibrium GDP for the private closed economy. $[ 400 billion b. Now open up this economy to international trade by including the export and import figures of columns 3 and 4. Fill in the gray shaded cells in columns 5 and 6. (1) (2) Aggregate Expenditures, Private Closed Economy, Billions (3) (4) (5) (6) Aggregate Expenditures, Private Open Economy, Billions Real Domestic Output (GDP DI), Billions Exports, Billions Net Exports, Billions Imports, Billions 200 240 20 30 -10 20 250 280 30 -10 300 20 20 20 320 30 -10 350 360 30 -10 400 400 -10 30 450 -10 440 20 30 500 480 20 30 -10 550 520 20 30 -10 Use columns 1 and 6 to determine the equilibrium GDP for the private open economy. S | billion.

Answer 1

GDP	AE , Closed economy	Exports	Imports	Net exports= X-M	AE , Open economy= AE, closed economy +NX
200	240	20	30	-10	230
250	280	20	30	-10	270
300	320	20	30	-10	310
350	360	20	30	-10	350
400	400	20	30	-10	390
450	440	20	30	-10	430
500	480	20	30	-10	470
550	520	20	30	-10	510

(a) The equilibrium for private closed economy is $400 billion i.e where AE for closed economy equals GDP.

(b) The equilibrium for private open economy is $350 billion i.e where AE for open economy equals GDP.

The change in equilibrium GDP caused by the addition of net exports is $(350-400)billion = -$50 billion.

(c) MPC = (Change in spending/ Change in GDP) = (40/50)= 0.8

Spending multiplier = 1/1-MPC = 1/1-0.8 = 1/0.2 = 5