All figures in the table below are in billions of dollars. Refer to the above data. If exports should decrease by $20 billion at each level of GDP, other factors constant, then the equilibrium GDP for the economy will be:
A) $650 billion
B) $550 billion
C) $500 billion
D) $450 billion

Question

All figures in the table below are in billions of dollars.  Refer to the above data. If exports should decrease by $20 billion at each level of GDP, other factors constant, then the equilibrium GDP for the economy will be:
A) $650 billion 
B) $550 billion 
C) $500 billion 
D) $450 billion

Quizplus · Accepted Answer

According to the table, at the initial level of GDP ($500 billion), equilibrium GDP is $500 billion. If exports decrease by $20 billion, net exports will decrease by $20 billion, causing aggregate expenditure to decrease by $20 billion at each level of GDP. This will lead to a decrease in equilibrium GDP by a multiple of the expenditure multiplier, which is 2. Therefore, the new equilibrium GDP will be $500 billion - ($20 billion x 2) = $500 billion - $40 billion = $460 billion. However, this is not the final answer as we need to repeat this process until equilibrium GDP no longer changes. If we plug $460 billion into the table, we find that the new equilibrium GDP is $450 billion. Therefore, the final answer is D: $450 billion.

All Figures in the Table Below Are in Billions of Dollars