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.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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The question is based on open economy
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.
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