Asked by Kylie Burchett on May 31, 2024
Verified
Refer to Scenario 34-1. For this economy, an initial increase of $200 in net exports translates into a(n)
A) $570 increase in aggregate demand when the crowding-out effect is taken into account.
B) $800 increase in aggregate demand when the crowding-out effect is taken into account.
C) $1,400 increase in aggregate demand in the absence of the crowding-out effect.
D) $800 increase in aggregate demand in the absence of the crowding-out effect.
Net Exports
The value of a country's total exports minus its total imports, indicating the balance of trade between a country and its trading partners.
Aggregate Demand
The overall appetency for every good and service in an economy, evaluated at a decided overall price level during a distinct timeline.
Crowding-out Effect
The phenomenon where increased government spending leads to a reduction in private sector investment, possibly due to higher interest rates or available resources.
- Learn about the multiplier effect and its operational dynamics within the economy.
Verified Answer
LT
leanna trujilloJun 05, 2024
Final Answer :
D
Explanation :
The marginal propensity to consume (MPC) is calculated as the change in consumption divided by the change in income, which is ($7,250 - $6,500) / ($11,000 - $10,000) = 0.75. The multiplier effect is 1 / (1 - MPC) = 1 / (1 - 0.75) = 4. Therefore, an initial increase of $200 in net exports would result in an $800 increase in aggregate demand (200 * 4) in the absence of the crowding-out effect.
Learning Objectives
- Learn about the multiplier effect and its operational dynamics within the economy.