Consider Two Economies,A and B

question 54

Multiple Choice

Consider two economies,A and B.Economy A has a marginal propensity to consume of 0.9,a net tax rate of 0.1 and a marginal propensity to import of 0.1.Economy B has a marginal propensity to consume of 0.6,a net tax rate of 0.2 and a marginal propensity to import of 0.2.Suppose there is a decrease in autonomous investment of $5 billion in each of these economies.Which of the following statements is true?

• A)The AD curve shifts farther to the left in Economy A than Economy B.
• B)The AD curve shifts farther to the right in Economy A than Economy B.
• C)The AD curve shifts to the left the same amount in both economies.
• D)The AD curve shifts to the right the same amount in both economies.
• E)The simple multiplier is larger in Economy B.

---

Definitions:

Multiplier

A factor by which an initial change in spending will alter total economic output by more than the initial monetary amount.

Marginal Propensity

A measure of how much an individual's consumption changes when their income changes.

Spending Multiplier

A concept in economics that refers to the ratio of a change in output to the initial change in spending that brought it about, indicating the ripple effect of spending through the economy.

Price Level

An index of the average prices of goods and services in an economy over time, indicating inflation or deflation trends.