Homework Help is Here – Start Your Trial Now!
Business
Economics
6.* This question is concerned with the repercussion effects of a domestic expansion once we recognize that, as a consequence, output abroad will expand. Suppose that at home there is an increase in autonomous spending, AĀ, that falls entirely on domestic goods. (Assume con- stant interest rates throughout this problem.) a. What is the effect on income, disregarding repercussion effects? What is the impact on our imports? Denote the increase in imports by AQ. b. Using the result for the increase in imports, consider what happens abroad. Our increase in imports means that foreign countries experience an increase in their exports and there- fore an increase in the demand for their goods. In response, their output expands. Assum- ing the foreign marginal propensity to save is s* and the foreign propensity to import is m*, by how much will a foreign country's income expand as a result of an increase in its exports? c. Now combine the pieces by writing the familiar equation for equilibrium in the domestic goods market: Change in supply, AY, equals the total change in demand, AĀ + AX - MAY (1s)AY, or AY= ΔΑ + ΔΙ s+m Noting that our increase in exports, AX, is equal to foreigners' increase in imports, we can replace AX with the answer to part (b) to obtain a general expression for the multi- plier with repercussions.

6.* This question is concerned with the repercussion effects of a domestic expansion once we recognize that, as a consequence, output abroad will expand. Suppose that at home there is an increase in autonomous spending, AĀ, that falls entirely on domestic goods. (Assume con- stant interest rates throughout this problem.) a. What is the effect on income, disregarding repercussion effects? What is the impact on our imports? Denote the increase in imports by AQ. b. Using the result for the increase in imports, consider what happens abroad. Our increase in imports means that foreign countries experience an increase in their exports and there- fore an increase in the demand for their goods. In response, their output expands. Assum- ing the foreign marginal propensity to save is s* and the foreign propensity to import is m*, by how much will a foreign country's income expand as a result of an increase in its exports? c. Now combine the pieces by writing the familiar equation for equilibrium in the domestic goods market: Change in supply, AY, equals the total change in demand, AĀ + AX - MAY (1s)AY, or AY= ΔΑ + ΔΙ s+m Noting that our increase in exports, AX, is equal to foreigners' increase in imports, we can replace AX with the answer to part (b) to obtain a general expression for the multi- plier with repercussions.

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter23: The International Trade And Capital Flows
Section: Chapter Questions
Problem 21SCQ: Explain briefly whether each of the following would be more likely to lead to a higher level of...
See similar textbooks
icon
Related questions
Question

The question is based on open economy Macroeconomics (photo attached). 

 

6.* This question is concerned with the repercussion effects of a domestic expansion once we recognize that, as a consequence, output abroad will expand. Suppose that at home there is an increase in autonomous spending, A A, that falls entirely on domestic goods. (Assume con- stant interest rates throughout this problem.) a. What is the effect on income, disregarding repercussion effects? What is the impact on our imports? Denote the increase in imports by AQ. b. Using the result for the increase in imports, consider what happens abroad. Our increase in imports means that foreign countries experience an increase in their exports and there- fore an increase in the demand for their goods. In response, their output expands. Assum- ing the foreign marginal propensity to save is s* and the foreign propensity to import is m*, by how much will a foreign country's income expand as a result of an increase in its exports? c. Now combine the pieces by writing the familiar equation for equilibrium in the domestic goods market: Change in supply, AY, equals the total change in demand, AÃ + AX – mAY + (1 – s)AY, or AA + AX s + m ΔΥ Noting that our increase in exports, AX, is equal to foreigners' increase in imports, we can replace AX with the answer to part (b) to obtain a general expression for the multi- plier with repercussions.
Transcribed Image Text:6.* This question is concerned with the repercussion effects of a domestic expansion once we recognize that, as a consequence, output abroad will expand. Suppose that at home there is an increase in autonomous spending, A A, that falls entirely on domestic goods. (Assume con- stant interest rates throughout this problem.) a. What is the effect on income, disregarding repercussion effects? What is the impact on our imports? Denote the increase in imports by AQ. b. Using the result for the increase in imports, consider what happens abroad. Our increase in imports means that foreign countries experience an increase in their exports and there- fore an increase in the demand for their goods. In response, their output expands. Assum- ing the foreign marginal propensity to save is s* and the foreign propensity to import is m*, by how much will a foreign country's income expand as a result of an increase in its exports? c. Now combine the pieces by writing the familiar equation for equilibrium in the domestic goods market: Change in supply, AY, equals the total change in demand, AÃ + AX – mAY + (1 – s)AY, or AA + AX s + m ΔΥ Noting that our increase in exports, AX, is equal to foreigners' increase in imports, we can replace AX with the answer to part (b) to obtain a general expression for the multi- plier with repercussions.
Expert Solution
steps

Step by step

Solved in 5 steps with 20 images

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Knowledge Booster
Exchange Rate
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Economics 2e
Principles of Economics 2e
Economics
ISBN:
9781947172364
Author:
Steven A. Greenlaw; David Shapiro
Publisher:
OpenStax
SEE MORE TEXTBOOKS