Thank you for visiting If the equilibrium income is currently 16 trillion and the marginal propensity to save MPS is 0 2 and there is a 1 trillion dollar. This page is designed to guide you through key points and clear explanations related to the topic at hand. We aim to make your learning experience smooth, insightful, and informative. Dive in and discover the answers you're looking for!
Answer :
Final answer:
To calculate the new GDP level after a decrease in exports, we use the economic multiplier effect. With an MPS of 0.2 and a decrease in exports of t trillion, the GDP would decrease by 5t trillion. However, the new GDP calculated does not match the provided options, implying a potential error in the question details.
Explanation:
The student's question is about calculating the new level of Gross Domestic Product (GDP) after a decrease in exports due to higher tariffs, given the marginal propensity to save (MPS) and the initial equilibrium income. Using the multiplier effect in economics, which is calculated as 1/(1-MPC), where MPC is the marginal propensity to consume (1 - MPS), we can determine the impact of a change in exports on GDP. In this case, MPS is 0.2, therefore MPC is 0.8, and the multiplier is 1/(1-0.8) = 5. A t trillion dollar decrease in exports will decrease GDP by 5t trillion dollars.
To find the new equilibrium GDP, subtract 5t from the initial equilibrium income of 16 trillion. Assuming t equals 1 (as the question specifies a t trillion dollar decrease), the decrease in GDP would be 5 trillion (5 * 1 trillion), leading to a new GDP level of 16 trillion - 5 trillion = 11 trillion. However, this result does not match any of the answer options provided, which suggests there might be a typo or misunderstanding in the initial question. If the decrease in exports was meant to be less than a trillion or a different factor is at play, it would affect the result accordingly. Please double-check the figures or provide additional context to receive the correct calculation.
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