Question

Questions 16 – 19. The data below is for the economy of Summerland.

GDP = DI (Billions)	C + I (Billions)	C + I + XN (Billions)	C + I + XN + G (Billions)
$300	$330
$340	$360
$380	$390
$420	$420
$460	$450
$500	$480
$540	$510
$580	$540
$620	$570

What is the equilibrium GDP for the private closed economy (C+I)?

$420 billion

$380 billion

$620 billion

$500 billion

If Net Exports is $20 billion, what is the equilibrium GDP for the private open economy?

$620 billion

$420 billion

$500 billion

$380 billion

If Net Exports is $20 billion and Government Spending $30 billion, what is the equilibrium GDP for the open mixed economy?

$420 billion

$380 billion

$500 billion

$620 billion

What is the multiplier in this economy?

2

3

4

5

Answer 1

1. What is the equilibrium GDP for the private closed economy (C+I)?

Option A ($420) is correct.

Reason: It is because in close economy GDP (or Y) is equal to AD (or C+I) at $420.

2. If Net Exports is $20 billion, what is the equilibrium GDP for the private open economy?

Option C ($500) is correct.

Reason: AD in open economy is equal to C+I+NX. Therefore with next export of $20, AD at all the given level of GDP will increase by $20. After this increase AD and GDP will be equal at $500.

3. If Net Exports is $20 billion and Government Spending $30 billion, what is the equilibrium GDP for the open mixed economy?

Option D ($620) is correct.

Reason: With net export and government spending, AD will now increase by $50 (=$20+$30). Therefore after this increase, AD and GDP will be equal at $620.

4. What is the multiplier in this economy? Option C (4) is correct. Reason: Multiplier (k) is calculated as: K = 1 - MPC Where, MPC is marginal propensity to consumer, which is calculated as: Change in consumption MPC = change in income At income of $300, consumption is $330 while at income of $340, consumption increase to $360. Therefore, change in income is $40 and change in consumption is $30. Therefore, 30 MPC = 0.75 40 Inserting the value in equation of multiplier, we get 1 k= 4 1 -0.75 0.25 = 1