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 31 Solutions
ECONOMICS W/CONNECT+20 >C<
- Based on the following statistics, how much is consumption? Total spending Investment Government spending Exports Imports O-$0.38 trillion O $5.13 trillion O $6.49 trillion O $11.62 trillion $11.62 trillion $2.56 trillion $2.95 trillion $1.80 trillion $2.18 trillionarrow_forwardADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption C= 100 + 0.75 Y. Assume further that planned investment /g, government spending G, and net exports Xn are independent of the level of real GDP and = 60, G= 0, and Xn= 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: constant at Y= C+ lg+ G+ Xn: Instructions: Round your answers to the nearest whole number. a. Calculate the equilibrium level of income or real GDP for this economy. $ b. What happens to equilibrium Yif lg changes to 40? What does this outcome reveal about the size of the multiplier? Multiplier =arrow_forwardRefer to the following table National Consumption Investment Government Net income spending spending spending exports 260 260 280 270 225 25 10 5 25 10 5 300 280 25 10 320 290 25 10 LQ LQ 5 340 300 25 10 5 360 310 25 10 5 LQ LO What is the equilibrium Y? a. 260 b. 280 c. 300 d. 320 cross out cross out cross out cross out e. 340 cross outarrow_forward
- ADVANCED ANALYSIS Assume that the consumption schedule for a private open economy is such that consumption C= 100 + 0.9 Y. Assume further that planned investment /g, government spending G, and net exports Xn are independent of the level of real GDP and constant at lg= 60, G= 0, and Xn= 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y= C+ lg+ G+ Xn. Instructions: Round your answers to the nearest whole number. a. Calculate the equilibrium level of income or real GDP for this economy. $ b. What happens to equilibrium Yif lg changes to 40? 2$ What does this outcome reveal about the size of the multiplier? Multiplier =arrow_forwardQUESTION 1 Below is the data for an economy in the year 2016. Gross Domestic Product = $25,000 Consumption expenditure $15,000 Government purchases $4,000 Exports $1,500 Imports = $2,500 %3D The investment expenditure for this economy would be? O $10,000 O $6,000 O $7,000 O $2,000arrow_forwardUse the table below to answer the following question: Component Consumption Government Purchases $3 Trillion Exports Imports Value $16 Trillion $1 Trillion $2 Trillion If GDP is equal to $23 Trillion, what must the value of the investment component be? O $1 Trillion O 3 Trillion O Negative $1 Trillion O $5 Trillionarrow_forward
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