Assume that a £1.00 increase in exports increases GDP by £2.00, and a £1.00 increase in income increases import spending by £0.15. In this case, a £500 million increase in exports will increase net exports by

Question

Quizplus · Accepted Answer

A £500 million increase in exports increases GDP by £1,000 million (since a £1 increase in exports increases GDP by £2). A £1,000 million increase in income increases import spending by £150 million (since a £1 increase in income increases import spending by £0.15). Therefore, the net increase in exports is £500 million (initial increase) minus £150 million (increase in imports) = £350 million.

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