The following table shows the hourly output per worker measured as quarts of oli

Question

The following table shows the hourly output per worker measured as quarts of olive oiland pounds of pasta in Greece and Italy Output per Hour of Work Olive Oil Pasta Greece Italy 12 The opportunity cost of producing one more quart of olive oil in Greece is 0.5 pounds of pasta. (Enter your response rounded to two decimal places.) The opportunity cost of producing one more quart of olive oil in Italy is 2 pounds of pasta. (Enter your response rounded to two decimal places) The opportunity cost of producing one more pound of pasta in Greece is 2 quarts of olive oil. (Enter your response rounded to two decimal places.) The opportunity cost of producing one more pound of pasta in Italy is quarts of olive oil. Enter your response rounded to two decimal places,)

Explanation / Answer

Opportunity cost is the amount of a good sacrificed when some other good is produced. In this case we have

Open economy has larger crowding out because a part of income is spent abroad. Hence in closed economy, increase in G will increase real GDP as well as the price level. In open economy, the effect is dampened because there is a larger crowding out.

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