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

-Refer to the above table.If net exports increased by $10 billion at each level of GDP,the equilibrium real GDP would be:
A) $550
B) $600
C) $650
D) $700

Question

The table shows a private,open economy.All figures are in billions of dollars.
 
-Refer to the above table.If net exports increased by $10 billion at each level of GDP,the equilibrium real GDP would be:
A) $550 
B) $600 
C) $650 
D) $700

Quizplus · Accepted Answer

An increase in net exports would increase aggregate demand (AD). This would shift the AD curve to the right, which would increase both equilibrium output and price level. In this case, the increase in net exports is $10 billion, which is smaller than the MPC of 0.8. Thus, the multiplier effect is: 1/(1-MPC) = 1/(1-0.8) = 5. With a multiplier of 5, the increase in AD would be: $10 billion x 5 = $50 billion. This increase in AD would shift the AD curve to the right from AD1 to AD2. At the intersection of AD2 and AS, the equilibrium output would be $650 billion.

The Table Shows a Private,open Economy