Consider Two Economies, Each with a Marginal Propensity to Consume

question 84

Multiple Choice

Consider two economies, each with a marginal propensity to consume of 0.8 and a net tax rate of 0.2. One economy is closed to international trade; the second is open to international trade with a marginal propensity to import of 0.3. Suppose there is an increase in autonomous spending of $5 billion in each of these economies. Which of the following statements is true?

• A)The AD curve shifts to the right by more in the closed economy than in the open economy.
• B)The simple multiplier is larger in the open economy than in the closed economy.
• C)The AD curve shifts to the right by more in the open economy than in the closed economy.
• D)The AD curve shifts to the right by the same amount in both economies.
• E)The AD curve shifts to the left by the same amount in both economies.

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