If the Economy Is Initially Suffering from a Recessionary Gap

question 37

Multiple Choice

If the economy is initially suffering from a recessionary gap equal to 50 units and the marginal propensity to consume is 0.9,then the income-expenditure multiplier is equal to _________,so if net exports rise by _________ units,the economy will return to potential output.

• A) 0.9;56
• B) 9;50
• C) 9;5
• D) 10;50
• E) 10;5

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Definitions:

Dividend Irrelevance

Dividend irrelevance theory suggests that the dividend policy a company follows has no effect on the company’s stock price or its cost of capital.

Transaction Costs

Expenses incurred when buying or selling goods and services, which can include commissions, fees, the spread between buy/sell prices, and other related costs.

Floatation Costs

The total costs associated with a company issuing new stocks or bonds, including underwriting, legal, registration, and other expenses.

Dividend Irrelevance Theory

A theory proposed by Modigliani and Miller that suggests dividend policies do not affect a company’s capital structure or stock price in a perfect market.