Table 13-3
All figures in billions of base-year dollars

-Refer to Table 13-3. Holding everything else constant, if net exports fall by $400 billion, equilibrium real GDP will decrease
A) $1,000 billion.
B) $800 billion.
C) $500 billion
D) $400 billion.

Question

Table 13-3
All figures in billions of base-year dollars
 
-Refer to Table 13-3. Holding everything else constant, if net exports fall by $400 billion, equilibrium real GDP will decrease
A) $1,000 billion. 
B) $800 billion. 
C) $500 billion 
D) $400 billion.

Quizplus · Accepted Answer

The decrease in net exports will lead to a multiplied effect on equilibrium real GDP due to the multiplier effect. If the marginal propensity to consume is 0.6, the multiplier is 1/(1-0.6) = 2.5. Therefore, a $400 billion decrease in net exports will decrease GDP by $400 billion * 2.5 = $1,000 billion.

Table 13-3 All Figures in Billions of Base-Year Dollars