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Questions › DSE › DSE 2007 › Q39
2 marksMacroeconomics › Keynesian cross and the multiplier › The open-economy multiplierHardabout 4 min

DSE 2007 Question 39: Keynesian cross and the multiplier

Two open economies with fixed exchange rates (rate = unity), i=1,2i=1,2i=1,2: Ci=c0i+c1i(Yi−Ti)C_{i}=c_{0i}+c_{1i}(Y_{i}-T_{i})Ci​=c0i​+c1i​(Yi​−Ti​), Ii=I‾iI_{i}=\overline{I}_{i}Ii​=Ii​, Gi=G‾iG_{i}=\overline{G}_{i}Gi​=Gi​, Ti=tiYiT_{i}=t_{i}Y_{i}Ti​=ti​Yi​, imports Mi=m0i+m1iYiM_{i}=m_{0i}+m_{1i}Y_{i}Mi​=m0i​+m1i​Yi​ (each country's exports are the other's imports). Given c01=c02=200c_{01}=c_{02}=200c01​=c02​=200, c11=c12=0.5c_{11}=c_{12}=0.5c11​=c12​=0.5, I1=I2=250I_{1}=I_{2}=250I1​=I2​=250, G1=114G_{1}=114G1​=114, G2=120G_{2}=120G2​=120, t1=t2=0.4t_{1}=t_{2}=0.4t1​=t2​=0.4, m01=m02=40m_{01}=m_{02}=40m01​=m02​=40, m11=0.05m_{11}=0.05m11​=0.05, m12=0.3m_{12}=0.3m12​=0.3, which is true?

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Two open economies with fixed exchange rates (rate = unity), i=1,2: Cᵢ=c₀ᵢ+c₁ᵢ(Yᵢ-Tᵢ), Iᵢ=I̅ᵢ, Gᵢ=G̅ᵢ, Tᵢ=tᵢYᵢ, imports Mᵢ=m₀ᵢ+m₁ᵢYᵢ (each country's exports are the other's imports). Given c₀₁=c₀₂=200, c₁₁=c₁₂=0.5, I₁=I₂=250, G₁=114, G₂=120, t₁=t₂=0.4, m₀₁=m₀₂=40, m₁₁=0.05, m₁₂=0.3, which is true? (A) Country 1 has a higher equilibrium output than Country 2 and runs a trade deficit vis-a-vis Country 2 (B) Country 1 has a lower equilibrium output than Country 2 and runs a trade deficit vis-a-vis Country 2 (C) Country 1 has a higher equilibrium level of output than Country 2 and it runs a trade surplus vis-a-vis Country 2 (D) Country 1 has a lower equilibrium output than Country 2 and runs a trade surplus vis-a-vis Country 2

Also written as: Two open economies with fixed exchange rates (rate = unity), i=1,2: C_i=c_(0i)+c_(1i)(Y_i-T_i), I_i=I_bar_i, G_i=G_bar_i, T_i=t_iY_i, imports M_i=m_(0i)+m_(1i)Y_i (each country's exports are the other's imports). Given c_(01)=c_(02)=200, c_(11)=c_(12)=0.5, I_1=I_2=250, G_1=114, G_2=120, t_1=t_2=0.4, m_(01)=m_(02)=40, m_(11)=0.05, m_(12)=0.3, which is true?

Keynesian cross and the multiplier has come up 167 times in 7 exams since 2006.

What this question tests

This question is on The open-economy multiplier, part of Keynesian cross and the multiplier in Macroeconomics.

How imports leak spending abroad and shrink the multiplier.

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