An economy has zero net exports Otherwise it is identical to

An economy has zero net exports. Otherwise, it is identical to the economy described below.

C

= 60 + 0.75 (Y – T)

I ^p

= 100

G

= 150

NX

= 0

T

= 180

The multiplier in this economy is 4.

a. Find short-run equilibrium output.

Instruction: Enter your response as an integer value.

Short-run equilibrium output: ____.

b. Economic recovery abroad increases the demand for the country’s exports; as a result, NX rises to 100.

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select) increases/decreases to ______.

c. Assume that foreign economies are slowing, reducing the demand for the country’s exports, so that NX = -100. (A negative value of net exports means that exports are less than imports.)

Instruction: Enter your response as an integer value.

Short-run equilibrium output (Click to select) decreases/increases to ______.

d. Which of the following best describes the tendency of recessions and expansions to spread across countries?

Lower planned aggregate spending in a nation means less imports of foreign goods, thereby reducing the short-term equilibrium output of its trading partners through lower net export (NX) values in those nations.

Lower planned aggregate spending abroad means that fewer goods will be exported from a specific nation, leaving more goods available for domestic consumption (C) in that nation, which will increase its short-term equilibrium output.

Lower planned aggregate spending in one nation will reduce the amount of goods it exports abroad, thereby lowering the value of imports for its trading partners, which will reduce its short-term equilibrium output as well.

Lower planned aggregate spending abroad will reduce the amount of investment that flows into domestic industries from other countries, thereby reducing domestic short-term equilibrium output.

Solution

a)

Y=C+I+G+NX

Y=60+.75(Y-180)+100+150+0

Y=60+.75Y-135+100+150

Y-.75Y=175

.25Y=175

Y=175/.25=700

Short run equilibrium output : 700

b) Now NX=100

Y=60+.75Y-135+100+150+100

.25Y=275

Y=275/.25=1100

Short run equilibriumoutput increases to: 1100

c) Now NX =-100

Y=60+.75Y-135+100+150-100

.25Y=75

Y=75/.25=300

Short run equilibrium level of output decreases to : 300

d) The tendency of recession and expansion to spread across nation is best explain by option (a) as for various nation in the world Net export is a major item of aggregate expenditure any change in Net export leads to changes in their equilibrium level of output.