In an economy with a GDP of $3,000 billion and a capital-output ratio of three,an increase in this year's full-employment GDP of $30 billion means that last year's intended investment must have increased by ________ billion.

Question

Quizplus · Accepted Answer

The capital-output ratio is defined as the ratio of capital (machinery, equipment, buildings, and infrastructure) to output (GDP). In this case, capital-output ratio is 3, which means that the economy has $9,000 billion worth of capital (3 times GDP of $3,000 billion).

An increase in full-employment GDP of $30 billion means that the economy needs an additional $30 billion worth of capital to produce and support the increased output. To calculate the increase in intended investment, we can use the formula:

Intended Investment = Change in Capital Stock = Capital-Output Ratio × Change in GDP

Substituting the given values, we get:

Intended Investment = 3 × $30 billion = $90 billion

Therefore, last year's intended investment must have increased by $90 billion to support an increase in full-employment GDP of $30 billion. The closest answer choice is C: $90 billion.

In an Economy with a GDP of $3,000 Billion and a Capital-Output