Question

Recall that in an open economy Y = C + I + G + NX, where...

Recall that in an open economy Y = C + I + G + NX, where
                            Net Exports NX = EX - IM.
     Suppose a country's exports EX are independent of (unrelated to) its national income Y, but its
      imports IM tend to increase whenever Y increases.

a. Briefly explain why imports might behave in this manner.

      b. Given these assumptions draw each of the following curves as a function of Y
           on a separate graph:

                1) Exports EX

                2) Imports IM

     3) Net Exports NX = EX – IM (be careful)

       c. Explain how this change concerning the behavior of net exports would
            affect the slope of the planned expenditure curve.

d. Refer to the round-by-round story to explain intuitively how this change would
       affect the multiplier.

            e. State and briefly explain how this change would affect the slope of the IS curve.

Homework Answers

Answer #1

a:-ans In an economy imports depend on the marginal propensity to import (mpm). If mpm is positive (say 0.1)then with increase in unit disposable income, import will increase (10%)

b:-ans Diagram submitted in photos

c:-ans The slope of planned expenditure curve will become flatter when we add net export to it because imports are negative function of national income.

d:-ans There will be a backward multiplier effect as imports are withdrawal from the circular flow.

K=1/1-(mpc-mpm)

e:-ans A high import propensity would make IS curve steeper. The higher the import propensity, the smaller the multiplier, so there will be a small shift.

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