Question

Assume taxes are zero, and an economy has a consumption function of c = 0.64 (Yd) $859.89. Ignoring price effects, by how much will GDP change if net exports _____?

Answer 1

If net exports increase, it will increase the aggregate demand, which in turn will increase GDP. The exact amount by which GDP changes depends on the multiplier effect, which measures the overall impact of changes in spending on GDP.

Step-by-step explanation:

In this case, we are given a consumption function of c = 0.64(Yd) - $859.89, where Yd represents disposable income. To find the change in GDP, we need to consider the impact of net exports. Net exports are calculated as exports minus imports. If net exports increase, it means exports exceed imports, resulting in a positive value.

If net exports increase, it will increase the aggregate demand, which in turn will increase GDP. The exact amount by which GDP changes depends on the multiplier effect, which measures the overall impact of changes in spending on GDP. The multiplier effect is determined by the marginal propensity to consume (MPC). In this case, the MPC is 0.64.

For example, let's say net exports increase by $100. The initial increase in spending from net exports will be $100 * 0.64 = $64. This initial increase will then lead to further increases in spending and GDP through the multiplier effect.