Assume that the economy is initially at its equilibrium level of GDP.What will happen to the equilibrium level of GDP if planned investment decreases by 20,government spending increases by 30,and taxes increase by 10?
A)GDP will decrease by 60
B)GDP will decrease by 10
C)there will be no change in GDP
D)GDP will increase by 10

Question

Quizplus · Accepted Answer

The decrease in planned investment would initially reduce GDP, but the increase in government spending more than offsets this reduction. The increase in taxes would typically reduce consumption, but overall, the net effect (decrease of 20 in investment, increase of 30 in government spending, and an effective decrease in disposable income due to 10 increase in taxes) leads to an increase in GDP. The specific numbers provided do not directly translate to the exact change in GDP due to the multiplier effect, but the direction of the change (increase) is clear.

Assume That the Economy Is Initially at Its Equilibrium Level