I would be really appriciate it! Thank you very much. Suppose investment falls b

Question

I would be really appriciate it! Thank you very much.

Suppose investment falls by $200 and equilibrium output falls by $500. Given this information, we know that: the marginal propensity to consume 0.9. the marginal propensity to consume 0.8. the marginal propensity to consume 0.75. O None of these QUESTION 43 ASO AST AS2 Real GDP, Y Refer to Figure 9.5. Suppose the economy is a point B. A large in the price level will move the economy to . decrease; point C decrease; AS decrease; point A decrease; AS

Explanation / Answer

For the first one, the answer is 0.6 because the effect of a fall in Investment will be [200/(1-c)] where c is the Marginal Propensity to Consumer and 1/(1-c) is the multiplier. If we equalise [200/(1-c)] = 500, we get c=0.6. Thus None of the above is the correct choice.

For the second one. If the price level decreases, real GDP will also decrease since GDP and Price level has a direct relation. Point is whether there will be a shift or a movement. Now, we are considering GDP for changes in price level and we have plotted these two in the graph above. Thus a change in price level will only cause movements along the same AS curve because the ceteris paribus condition will hold. It will only when the ceteris paribus condition will be relaxed that the AS curve will shift. Thus options 2 and 4 are invalid. Considering option 1, it will incorrect because it is showing an inverse relation between GDP and price level. Thus Option 3 is correct. The new point will be A.

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