Question

Suppose booming economies in the BRIC nations causes net exports to rise by $75 billion in the United States. If the MPC is 0.8 what will be the change in equilibrium GDP

Answer 1

$375 billion

Step-by-step explanation:

Given: MPC= 0.8

Net export rises by $75 billion.

There are factors that determine GDP are:

• Invesntment.
• Consumption.
• Government expenditure.
• Net export.

MPC is marginal propensity to consume, the higher MPC result in higher multiplier, thus there is an increase in GDP, assuming other factor remain constant.

Multiplier=
`1/ (1-MPC)`

First finding the multiplier.

Multiplier=
`1/ (1-0.8)`

⇒ Multiplier=
`1/ (0.2)`

Opening parenthesis.

∴ Multiplier= 5

Now, finding the change in equilibirium GDP due to rise in net export.

Change in equilibirium GDP=
`Multiplier* rise\ in\ net\ export`

⇒ Change in equilibirium GDP=
`5* \$ 75\ billion`

∴ Change in equilibirium GDP=
`\$ 375\ billion`

Hence, there will be increase in $375 billion GDP if the MPC is 0.8.