we allow for international trade. Use the following information from problem 1: C = 400
2. Imports and Exports
Now we allow for international trade. Use the following information from problem 1:
C = 400 + (8/9)*DI I = 300
G = 800
T = (1/2)*Y.
Suppose that exports are constant at X = 300.
Let imports be a fraction of real income: M = (1/9) * Y.
a. Give intuition for why imports M are positively related to
b. Suppose that national income increases by $1. How much will spending on imports increase (the marginal propensity to import) in this case?
c. Compute the equilibrium level of national income under international trade. d. Suppose that government spending increases by $120.
i) Compute the new equilibrium national income.
ii) Based on your numerical answer to (i), calculate the change in national income from a one dollar increase in government spending.
iii) Derive the new fiscal multiplier from an increase in government spending using an algebraic equation. Compare to Problem 2.d.(ii). Compare to Problem 1.c.(v).
e. Trade Representative: “In an open economy with international trade, government spending is much more effective at fighting recessions than in a closed economy.” Evaluate.
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