In an open economy with government and demand- determined output, a decrease in the equilibrium level of national income could be caused by
A)a decrease in the desired level of saving at all levels of income.
B)an increase in government purchases.
C)a decrease in the desired level of imports at all levels of income.
D)a decrease in taxes at all levels of income.
E)a decrease in desired consumption at all levels of income.

Question

Quizplus · Accepted Answer

A decrease in desired consumption at all levels of income would lead to a decrease in the equilibrium level of national income. This is because in a demand-determined output model, changes in consumption have a multiplier effect on output. A decrease in consumption leads to a decrease in aggregate demand, which in turn leads to a decrease in output and national income. Other options, such as an increase in government purchases or a decrease in taxes, would lead to an increase in aggregate demand and output. A decrease in desired imports or desired saving would also increase aggregate demand but would not necessarily lead to a decrease in national income.

In an Open Economy with Government and Demand- Determined Output