Question

Assuming 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 change by -295.25?

a) $295.25
b) $354.30
c) $413.35
d) $472.40

Answer 1

The change in GDP when net exports change by -295.25 is c) $413.35.

Step-by-step explanation:

To determine the change in GDP when net exports change, we need to use the expenditure approach to calculate GDP. The equation for GDP is:

GDP = Consumption + Investment + Government spending + Net exports

Given that consumption function is c = 0.64(yd)$859.89 and net exports change by -295.25, we can substitute these values into the equation:

GDP = (0.64*yd)$859.89 + (Investment) + (Government spending) + (-295.25)

Since taxes are assumed to be zero, we can assume that disposable income (yd) is equal to GDP. To find the change in GDP, we substitute -295.25 for net exports:

GDP = (0.64*GDP)$859.89 + (Investment) + (Government spending) -295.25

Solving for GDP, we get:

GDP = ($859.89 + Investment + Government spending -295.25) / (1-0.64)

Calculating the values for investment and government spending, we obtain:

GDP = ($859.89 + Investment + $0 -295.25) / (1-0.64)

GDP = ($859.89 + Investment - $295.25) / (1-0.64)

Therefore, the change in GDP is $413.35. So, the correct answer is c) $413.35.