In an article regarding Bangladeshʹs economy, the author suggests that the government ...ʺ[g]ive double tax breaks on investment dollars. Give a tax break to R&D [research and development]. Give a tax break on donations to educational institutions.ʺ
Suppose the multiplier in Bangladesh is 2. As a result of enacting the proposed policies, which of the following describe possible outcomes in the short run?
i. an $20 billion increase in investment will increase aggregate expenditure by $40 billion.
ii. the AE curve will shift upward.
iii. there will be an unplanned increase in inventories.

Question

Quizplus · Accepted Answer

i. an $20 billion increase in investment will increase aggregate expenditure by $40 billion. This is true as the multiplier in Bangladesh is given as 2. Therefore, a $20 billion increase in investment will lead to a $40 billion increase in aggregate expenditure (i.e., 2*20).

ii. the AE curve will shift upward. This is also true as the proposed policies aim to increase investment and R&D, which will increase aggregate expenditure and shift the AE curve upward.

iii. there will be an unplanned increase in inventories. This statement cannot be determined from the given information. It is not clear whether the proposed policies will lead to an unplanned increase in inventories or not.

In an Article Regarding Bangladeshʹs Economy, the Author Suggests That