Consider Two Economies,A and B

question 126

Multiple Choice

Consider two economies,A and B.Economy A has a marginal propensity to consume of 0.9,a net tax rate of 0.2 and a marginal propensity to import of 0.2.Economy B has a marginal propensity to consume of 0.7,a net tax rate of 0.2 and a marginal propensity to import of 0.2.Suppose there is an increase in autonomous investment of $5 billion in each of these economies.Which of the following statements is true?

• A)There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment.
• B)There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment.
• C)There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment.
• D)There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment.
• E)There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment.

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Definitions:

Normal Profit

The minimum amount of profit needed for a company to remain competitive in the market; it equals the total opportunity costs of a firm.

Economic Profits

The surplus or profit earned by a firm or individual after accounting for both explicit and implicit costs.

Purely Competitive Industry

An industry characterized by many small firms producing identical products where no single firm can influence the market price.

Consumer Demand

The desire and willingness of consumers to purchase goods and services at given prices.