Suppose the government share of GDP is 20 percent and the consumption, investment, and net export shares of GDP are 60, 15, and 5 percent, respectively. If, all else held constant, businesses become more optimistic about the benefits of investment, then
A)investment spending as a share of GDP increases.
B)the nongovernment share of GDP remains constant.
C)the rate of interest increases.
D)the government share of GDP remains at 20 percent.
E)All of these

Question

Quizplus · Accepted Answer

When businesses become more optimistic about the benefits of investment, they are likely to invest more, increasing investment spending as a share of GDP (A). This does not necessarily change the government's share of GDP, which can remain at 20 percent (D), because the increase in investment could come at the expense of other non-government components of GDP, such as consumption or net exports, keeping the nongovernment share constant (B). Increased demand for investment funds can also lead to an increase in the rate of interest (C), as more businesses compete for available funds.

Suppose the Government Share of GDP Is 20 Percent and the Consumption