Suppose planned investment drops by 200.
(a) First, graphically illustrate the effects of this reduction in planned investment using the AE - Y graph. Explain what effect it will have on the economy.
(b) Now suppose policymakers wish to prevent this drop in I from having any effect on output. How much would government spending have to increase in order to prevent any change in Y? Explain.
(c) Rather than use a change in spending, suppose policymakers wish to use a change in taxes to prevent Y from changing. Explain what must happen to taxes to achieve this.
(d) Briefly compare and explain any differences in the size of the change in G and change in T in parts (b) and (c).

Question

Quizplus · Accepted Answer

The Answer of Suppose planned investment drops by 200.
(a) First, graphically illustrate the effects of this reduction in planned investment using the AE - Y graph. Explain what effect it will have on the economy.
(b) Now suppose policymakers wish to prevent this drop in I from having any effect on output. How much would government spending have to increase in order to prevent any change in Y? Explain.
(c) Rather than use a change in spending, suppose policymakers wish to use a change in taxes to prevent Y from changing. Explain what must happen to taxes to achieve this.
(d) Briefly compare and explain any differences in the size of the change in G and change in T in parts (b) and (c).

Suppose Planned Investment Drops by 200