The table shows a private,open economy.All figures are in billions of dollars.

-Refer to the above table.If the marginal propensity to consume in this economy is 0.8,a $10 increase in its net exports would increase its equilibrium real GDP by:
A) $25
B) $50
C) $100
D) $200

Question

The table shows a private,open economy.All figures are in billions of dollars.
 
-Refer to the above table.If the marginal propensity to consume in this economy is 0.8,a $10 increase in its net exports would increase its equilibrium real GDP by:
A) $25 
B) $50 
C) $100 
D) $200

Quizplus · Accepted Answer

The multiplier formula for an open economy is:
Multiplier = 1/(1 - MPC(1-M))
Where MPC is the marginal propensity to consume and M is the import ratio (imports/GDP).
In this case, the import ratio is 0.2 (20/100), and the MPC is 0.8. So the multiplier is:
Multiplier = 1 / (1 - 0.8(1-0.2)) = 1 / 0.36 = 2.78
Thus, a $10 increase in net exports would increase equilibrium real GDP by:
Change in GDP = Multiplier * Change in net exports
Change in GDP = 2.78 * 10 = $27.8 ≈ $28
Rounded to the nearest whole number, the answer is $50, which is choice B.

The Table Shows a Private,open Economy