Problem 115 Algo The data in columns 1 and 2 in the table be

Problem 11-5 (Algo) 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 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 the gray- shaded cells in columns 5 and 6. Aggregate Aggregate Real Domestic Billions 5200 5250 $300 $350 $400 $450 $500 $550 Net Exports, xpenditures, Output (GDP - DI), Expenditures, Private Exports, l Billions Billions Private Open Economy. Billions Closed Economy Billions Billions 5240 5280 $320 $360 $400 $440 $480 5520 530 530 530 S30 S30 S30 Determine the equilibrium GDP for the open economy. What is the change in equilibrium GDP caused by the addition of net exports: C. Given the original $30 billion level of exports, what would be net exports and the equilibrium GDP if imports were $10 billion less at each level of GDP? Fill in the gray-shaded cells. ggregate Billions Imports, Billions Net Exports, 510 $10 Output (GDP-DI)xpenditures, Private Exports, Closed Eco nomy Billions 200 S250 S300 S350 $400 $450 S500 S550 5240 $280 S320 S360 $400 $440 5480 5520 30 $10 $10 $10 510 Equilibrium GDP billion d. What is the multiplier in this example? billion

Solution

a. Using Column 1 & 2, the equlibrium GDP for this hypothetical economy is $400 billion.

It is so because when Real Domestic ouptut is $400 it is equal to Aggregate Expenditure. And equlibrium GDP is where Real domestic output = Aggregate Expenditure.

b.

- Equilibrium GDP in open economy is $450 billion. It is so because at GDP $450 billion the Real domestic output is equal to Aggregate expenditures, Private open economy.

- Change in the GDP causes by the addition of net exports is $50 billion ($450 - $400) billion.

c.

Equlibrium GDP = $500 billion.

d. The multiplier = 1/ 1-MPC

so to find multiplier we have to find MPC

and MPC = change in consumption / change in income

So here we look at change in aggregate expenditure (closed or open economy) / change in Real domestic output.

first lets take aggregate expenditure closed economy

MPC = 40 / 50

as you can see it from the table when the real domestic output changes from $200 to $250 the aggregate expenditure closed economy changes from $240 to $280

so change in real domestic output is 250 - 200 = $50billion and

change in aggregate expenditure is 280 - 240 = $40 billion.

so MPC = 40/50 = 0.8

even when we take the aggregate expenditure (open economy) we will get the same MPC because change in aggregate expenditure is $40 billion when real domestic output increases from $50 billion.

so multiplier = 1/ 1-0.8 = 5

Multiplier in this example is 5.

1	2	3	4	5	6
Real Domestic output	Aggregate Expenditure (private closed economy)	Exports	Imports	Net exports	Aggregate Expenditure (private open economy)
$200	$240	$30	$20	30 - 20 = $10	240 + 10 = $250
$250	$280	$30	$20	30 - 20 = $10	280 + 10 = $290
$300	$320	$30	$20	30 - 20 = $10	320 + 10 = $330
$350	$360	$30	$20	30 - 20 = $10	360 + 10 = $370
$400	$400	$30	$20	30 - 20 = $10	$410
$450	$440	$30	$20	30 - 20 = $10	$450 (Equlibrium GDP in open economy
$500	$480	$30	$20	30 - 20 = $10	$490
$550	$520	$30	$20	30 - 20 = $10	$530