Suppose a booming economy in Europe causes net exports to rise by $75 billion in the United States

Economics Dec 17, 2020

Suppose a booming economy in Europe 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?

Expert Solution

The full Keynesian macroeconomic equation is gross domestic product (GDP) equals consumption (C) plus investment (I) plus government spending (G) plus the net of exports (X) minus imports (M), or GDP = C + I + G + (X - M). The entire $75 billion will become part of the GDP. The MPC means that 80% of the change will be in consumption, while the other 20% will become part of investment or government spending. We can't say much more than that without having additional information about tariffs and taxes.

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