Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 23: Problem 7

Suppose we drop the assumption that net exports do not depend on real GDP. Draw a graph with the value of net exports on the vertical axis and the value of real GDP on the horizontal axis. Now, add a line representing the relationship between net exports and real GDP. Does your net exports line have a positive or negative slope? Briefly explain.

Short Answer

Expert verified
The line representing the relationship between net exports and real GDP has a negative slope. This indicates that an increase in real GDP would decrease net exports, as greater income and consumption are likely to lead to increased imports.

Step by step solution

01

Understanding the relationship between net exports and real GDP

According to economic theory, an increase in Real GDP generally means an increase in income and consumption. This may lead to an increase in imports, causing the net exports (exports – imports) to decrease. So, there is generally a negative relationship between real GDP and net exports.
02

Sketeching the graph

Draw the horizontal axis, labeling it as 'Real GDP' and the vertical axis, labeling it as 'Net Exports'. Real GDP increases as we move to the right on the horizontal axis while net exports increase as we move upward on the vertical axis.
03

Adding the line on the graph

From the origin, draw a decreasing line. The line should slope downwards from left to right. This line represents the negative relationship between net exports and real GDP.
04

Interpreting the slope of the line

The slope of the line on the graph is negative. This means that an increase in real GDP would decrease net exports, which is consistent with the economic theory explained in step 1.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

An article in the Wall Street Journal stated that at the beginning of May \(2017,\) inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a \(12 \%\) increase in actual vehicles on dealer lots compared with the prior year.... That number is far above the industry norm for inventory." Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising? How are these automakers likely to react to the increase in inventories?

An article published in an economics journal found the following: "For the poorest households, the marginal propensity to consume was close to \(70 \% .\) For the richest households, the MPC was only \(35 \%\)." Assume that the macroeconomy can be divided into three sections. Section A consists of the poorest households, Section \(\mathrm{B}\) consists of the richest households, and Section C consists of all other households. a. Compute the value of the multiplier for Section A. b. Compute the value of the multiplier for Section \(\mathrm{B}\). c. Assume that there was an increase in planned investment of \(\$ 4\) billion. Compute the change in equilibrium real GDP if the \(M P C\) for the economy was 70 percent (or 0.70\()\). Compute the change in equilibrium real GDP if the \(M P C\) for the economy was 35 percent (or 0.35\()\).

What is likely to happen if firms accumulate large amounts of unplanned inventory at the beginning of a recession?

An article in the Wall Street Journal on the housing market stated, "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Why do low interest rates increase the demand for housing? In which component of aggregate expenditure does the Bureau of Economic Analysis include purchases of new houses?

Explain whether you agree with the following statement: "The reason the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services."
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free