GDP and the Multiplier Application
Most estimates indicate that the marginal propensity to consume in China is approximately 0.50. If we ignore a rise in the price level generated by a boost in aggregate demand that results from an increase in real autonomous spending, the value of the multiplier would be about 2. [This is so because 1/(1-MPC) = 1/(1-0.5) = 1/0.5 = 2]. Economists at the Hong Kong Monetary Authority have estimated, thought, that the short-run effect of an initial rise in real autonomous spending on China's real GDP is actually much smaller.Therefore, once the effect on real GDP of an upward price level adjustment is taken into account, the estimated result from a one-unit increase in real autonomous expenditures is only a 1.1 unit increase in China's annual real GDP.
By about how much would China's equilibrium real GDP change if the nations's net export spending declined by 1 trillion yuan?
What Implications would this change in Chinese GDP have for U.S. exports, imports, and GDP?