In a Closed Economy, What Happens to the Present Value

question 143

Multiple Choice

In a closed economy, what happens to the present value of GDP (discounted at 5%) following an output shock (decline) of 21% recovered the following year?

• A) There is a permanent drop of 1% in the present value of GDP.
• B) There is no long-run effect on present value.
• C) There is a 1-year drop of 1% in GDP the first year followed by full recovery.
• D) There is a downward spiral in real GDP resulting in a permanent drop of 21%.

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Definitions:

Demand Curve

A graphical representation that shows the quantity of a product or service desired by buyers at various price levels.

Tax

Mandatory financial charges or other types of levies imposed upon a taxpayer by a governmental organization in order to fund government spending and various public expenditures.

Buyers

Individuals or entities that purchase goods or services for personal use, resale, or as inputs to production.

Tax Revenue

The financial returns that governments earn from taxes.