Suppose the Government's Share of GDP Declines by 10 Percent

question 108

Essay

Suppose the government's share of GDP declines by 10 percent. Draw a diagram to show what the I/Y and X/Y curves will look like if there is very little change in the interest rate. Does this mean that nongovernment spending is not sensitive to changes in the interest rate? Explain.

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Definitions:

Contribution

The amount of money or resources that an individual or entity provides towards a particular project, investment, or cause.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the proportion of fixed to variable costs.

Fixed Costs

Costs that do not fluctuate with changes in production level or sales volume, such as rent, salaries, and insurance.

EBIT

Earnings Before Interest and Taxes, also known as EBIT, is a way to evaluate a company's profit without considering tax and interest expenses.