ECONOMICS
AGGREGATE DEMAND
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Real GDP will increase by $4 billion
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Real GDP will decrease by $18 billion
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Real GDP will decrease by $40 billion
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Real GDP will decrease by $36 billion
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Real GDP will increase by $36 billion
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Detailed explanation-1: -Which of the changes described below would be the most likely reason for a $40 billion increase in Bloominonionland’s real GDP? Investment spending in Gerbilia decreased by $6 billion.
Detailed explanation-2: -Such fiscal policy has a multiplier effect. That is, every dollar spent can be expected to cause an increase in the gross domestic product (GDP) by more than a dollar. This is due to the sheer momentum created by the policy. Consumers spend more so businesses produce more goods.
Detailed explanation-3: -Changes in investment will affect the investment multiplier but not the expenditure multiplier. Since the expenditure multiplier increases as MPC increases in cannot increase when MPC decreases.
Detailed explanation-4: -The tax multiplier is smaller in absolute value than the government expenditure multiplier because the government expenditure affects the total expenditure and taxes through the multiplier. The tax multiplier also influences the disposable income which affects the overall consumption level.