Assume the Following. • the MPC Has a Value of 0.8

question 458

Multiple Choice

Assume the following.
• The MPC has a value of 0.8.
• The relationship between the interest rate, r, and investment, I, is given by the equation,
I = 20,000 - br,
Where b is a positive constant.
• Government purchases, G, are increased by $1,000.
In which of the following cases would there be no crowding out?

• A) b = 0
• B) b = 0.2
• C) b = 0.8
• D) b = 1

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Definitions:

Depreciable Equipment

Tangible assets used in operations that lose value over time due to usage, wear and tear, or obsolescence, and thus can be depreciated for accounting and tax purposes.

Net Cash Flows

The difference between cash inflows and outflows in a given period, reflecting the company's overall liquidity position.

Internal Rate of Return

The discount rate at which the net present value of an investment's cash flows equals zero.

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds.