One effect of German unification was a rise in demand for most Western countriesĂ˘â‚¬â„˘ exports. However, the impact differed considerably among countries, depending on the multipliers that transform an exogenous change in demand into a change in income. Consider the Netherlands and the United Kingdom. The share of imports in Dutch GDP is 52%, the share of imports in British GDP is 27%. Assume that these average import propensities are also the marginal propensities to import. Assume, further, that for both countries the marginal propensity to consume is 80% and the average tax rate is 30%. (a) Calculate the equilibrium effect of an exogenous increase of export demand by 100 units on Dutch and British GDP. (b) Employ the successive-rounds interpretation of the multiplier. By how much has income increased after round #3 in total?
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