Answer to Question #192788 in Macroeconomics for Elizabeth Mulingen

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

.Use the multiplier applicable to export,to explain how a100–billion decline in demand

for export could affect the economy’s:

(i)

GDP/income

Answer 1

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

$Export \space Multiplier=\frac{1}{1-MPC+M}$

M is the marginal propensity to import which is calculated by dividing the change in spending on imports by change in income. According to the question, the change in spending on imports is 0.25 and the change in income is 0.5. Thus,

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

$=\frac{0.25}{0.5}$

$=0.5$

 Hence, the marginal propensity to import is 0.5.

Therefore the export multiplier will be:

$=\frac{1}{1-0.75+0.5}\\=1.33$

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.