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

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?

Solutions

Expert Solution

(a) Closed economy equilibrium occurs at the point where GDP = AE private closed economy.

Therefore, the closed economy equilibrium GDP is 400.

(b)

GDP	AE private closed economy	exports	imports	Net exports	AE private open economy
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

Net exports = Exports - Imports

AE private open economy = AE private closed economy + Net exports

Open economy equilibrium occurs at GDP = AE private open economy.

Therefore, open economy equilibrium is 350.

The equlibrium output decrease by the 50 due to the addition of net exports.

Slope of AE = Change in AE / Change in GDP

Slope of AE = 40/50

Slope of AE = 0.8

Slope of AE = MPC = 0.8

Multiplier = 1/ (1-MPC)

Multiplier = 1 / (1 - 0.8)

Multilpier = 1/ 0.2

Multiplier = 5

Rahul Sunny answered 1 week ago

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