If the marginal propensity to consume in this economy is 0.6, and net export increase by...

If the marginal propensity to consume in this economy is 0.6, and net export increase by $ 10 billion. Calculate multiplier and change in real GDP due to multiplier effect. Discuss the relationship between net export and multiplier. Use proper refences and citations. I need help with finding citation and reference

Expert Solution

Ans. Increase in real GDP = multiplier * Increase in Net exports

Multiplier = 1/(1-Marginal Propensity to Consume) = 1/(1-0.6) = 2.5

Increase in real GDP = 2.5*10 billion = $25 billion

Thus, real GDP increases by $25 billion when net exports increase by $10 billion.

This is because increase in exports increases income of households in home, this leads to increase in household consumption expenditure which increases aggregate demand increasing real GDP. This increase in real GDP increases income of households again increasing consumption expenditure and this increases real GDP again and this cycle goes on.
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Rahul Sunny answered 2 years ago

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