Question

If consumption is C=100+0.75Yd

Taxes is T=50+0.5Y

Export is X=200

Import is M=50+0.25Y

Government spending is G=150

Investment is I=200. Y is domestic income and Y is private disposable income. Use the multiplayer application to export, to explain how a 100 billion decline in demand for export could affect the economie's GDP/income

Answer 1

An export multiplier is a multiplier that applies to exports. The effect of a decline in demand by 100 billion on GDP/income will be computed by the export multiplier. Thus,

$M=\frac{change\space in\space import\space spending}{change\space in\space income}$

$=\frac{0.25}{0.5}$

$=0.5$

Export multiplier$=\frac{1}{(1-MPC)+M}$

$=\frac{1}{(1-0.75)+0.5}$

$=1.33$

Where (1 – MPC) is marginal propensity to save (MPS) and M is marginal propensity to import.

The export multiplier shows that the GDP/income will be decreased by 1.33 billion with the decline in the 100-billion decline in the demand.