Subpart (a):
Equilibrium GDP and the multiplier.
Subpart (a):
Explanation of Solution
Table -1 shows the value of import and export at different level of GDP.
Table 1
(1) Real domestic output |
(2) Aggregate expenditure, private closed economy |
(3) Export (in billions) |
(4) Import (in billions) |
$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 | $500 | $20 | $30 |
The equilibrium GDP of closed economy (Gross Domestic Product) occurs at the point where the aggregate expenditure for the closed economy is equal to real domestic output. Table -1 reveals that, aggregate expenditure and real domestic output is equal at the point of $400. Thus, equilibrium GDP is $400.
Concept Introduction:
Aggregate Expenditure (AE): It is the total value of spending in the economy during a period of time at given price level.
Equilibrium gross domestic product (GDP): Equilibrium GDP occurs at the point where the aggregate expenditure equals the real GDP.
Multiplier effect: It describes how an injection to the economy via increase in government spending, investment spending, consumer spending and so forth create a ripple effect in the real output (increase) of the economy.
Subpart (b):
Equilibrium GDP and the multiplier.
Subpart (b):
Explanation of Solution
The net export can be calculated by using the following formula.
Substitute the respective values in Equation (1) to calculate the net export at the real output $200.
The net export is -$10 billion.
The aggregate expenditure (AE) of open economy can be calculated by using the following formula.
Substitute the respective values in Equation (1) to calculate the aggregate expenditure at the real output $200.
The aggregate expenditure of open economy is $230 billion.
Table -2 shows the value of net export and aggregate expenditure of open economy that obtained by using equation (1) and (2).
Table -2
(1) Real domestic output |
(2) Aggregate expenditure, private closed economy |
(3) Export (in billions) |
(4) Import (in billions) |
(5) Net export (in billions) Private closed economy |
(6) Aggregate Expenditure (in billions), 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 | $500 | $20 | $30 | -$10 | $510 |
The equilibrium GDP of open economy occurs at the point where the aggregate expenditure for the open economy is equal to real domestic output. Table -1 reveals that, aggregate expenditure and real domestic output is equal at the point of $350. Thus, equilibrium GDP is $350. The equilibrium GDP is decrease from $400 to $350. Thus, the change in equilibrium GDP is -$50 billion
Concept Introduction:
Aggregate Expenditure (AE): It is the total value of spending in the economy during a period of time at given price level.
Equilibrium gross domestic product (GDP): Equilibrium GDP occurs at the point where the aggregate expenditure equals the real GDP.
Multiplier effect: It describes how an injection to the economy via increase in government spending, investment spending, consumer spending and so forth create a ripple effect in the real output (increase) of the economy.
Subpart (c):
Equilibrium GDP and the multiplier.
Subpart (c):
Explanation of Solution
Table -3 shows the value of net export and aggregate expenditure of open economy that obtained by using equation (1) and (2).
Table -3
(1) Real domestic output |
(2) Aggregate expenditure, private closed economy |
(3) Export (in billions) |
(4) Import (in billions) |
(5) Net export (in billions) Private closed economy |
(6) Aggregate Expenditure (in billions), open economy |
$200 | $240 | $20 | $40 | -$20 | $220 |
$250 | $280 | $20 | $40 | -$20 | $260 |
$300 | $320 | $20 | $40 | -$20 | $300 |
$350 | $360 | $20 | $40 | -$20 | $340 |
$400 | $400 | $20 | $40 | -$20 | $380 |
$450 | $440 | $20 | $40 | -$20 | $420 |
$500 | $480 | $20 | $40 | -$20 | $460 |
$550 | $500 | $20 | $40 | -$20 | $500 |
The equilibrium GDP of open economy occurs at the point where the aggregate expenditure for the open economy is equal to real domestic output. Table -1 reveals that, aggregate expenditure and real domestic output is equal at the point of $300. Thus, equilibrium GDP is $300.
Concept Introduction:
Aggregate Expenditure (AE): It is the total value of spending in the economy during a period of time at given price level.
Equilibrium gross domestic product (GDP): Equilibrium GDP occurs at the point where the aggregate expenditure equals the real GDP.
Multiplier effect: It describes how an injection to the economy via increase in government spending, investment spending, consumer spending and so forth create a ripple effect in the real output (increase) of the economy.
Subpart (d):
Equilibrium GDP and the multiplier.
Subpart (d):
Explanation of Solution
The multiplier is calculated as follows.
The multiplier is 5 in this example.
Concept Introduction:
Aggregate Expenditure (AE): It is the total value of spending in the economy during a period of time at given price level.
Equilibrium gross domestic product (GDP): Equilibrium GDP occurs at the point where the aggregate expenditure equals the real GDP.
Multiplier effect: It describes how an injection to the economy via increase in government spending, investment spending, consumer spending and so forth create a ripple effect in the real output (increase) of the economy.
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Chapter 29 Solutions
Connect 2-Semester Access Card for Economics
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