Now consider the following data (in constant, 2010 prices) for Brazil (OECD, Mai
ID: 1116584 • Letter: N
Question
Now consider the following data (in constant, 2010 prices) for Brazil (OECD, Main Economic Indicators, National Income Accounts): Brazilian Real, billions
Year GDP C EX IM
2000 785 496 0 76
2016 1,147 763 156 146
(d) Calculate the marginal propensities to consume (b) and import (m) over the 2000-2016 period Suppose there is a deterioration in Brazilian consumer confidence, which causes a drop in exogenous consumption, a, by 1% of (2016) GDP. (e) Suppose Brazil is a closed economy. How would this drop in consumer confidence affect output? What fiscal policy (change in G) would prevent this output effect? (f) Now suppose Brazil is open. How would the drop in consumer confidence affect output and the trade balance? What fiscal policy is needed now to neutralize the output effect?
Explanation / Answer
d.
Y = 1147 - 785= 362
C = 763 - 496 = 267
M = 146-76 = 70
MPC = C/Y and MPM = M/Y
MPC = 267/362 = 0.74
MPM = 70/362 = 0.19
e. If Brazil is a closed economy, then a drop in consumer confidence would result in aggregate demand shifting down which results in drop in output and price level.
In this case, the multiplier will be 1/ (1-MPC) = 1/1-0.74 = 1/0.26 = 3.85. For 1% drop in exogenous consumption a, the drop in output will be 3.85%.
The govt can increase its spending to prevent this output effect.
f. In an open economy, the multiplier will be 1/(1- MPC + MPM) = 1/(1-0.74+0.19) = 2.22. For 1% drop in exogenous consumption a, the drop in output will be 2.22%.
With a decline in income and output, it is expected that the trade balance would get better. This is because it will result in decline in consumption of imports.
The govt. can increase its spending to prevent this decline in output. However, it may also provide export subsidies to further improve trade balance.
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