Consider two economies,A and B.Economy A has a marginal propensity to consume of 0.9,a net tax rate of 0.3 and a marginal propensity to import of 0.3.Economy B has a marginal propensity to consume of 0.9,a net tax rate of 0.1 and a marginal propensity to import of 0.3.Suppose there is an increase in autonomous investment of $5 billion in each of these economies.Which of the following statements is true?
A)There is a larger decrease in real GDP in Economy B as a result of the change in autonomous investment.
B)There is a larger decrease in real GDP in Economy A as a result of the change in autonomous investment.
C)There is a larger increase in real GDP in Economy B as a result of the change in autonomous investment.
D)There is a larger increase in real GDP in Economy A as a result of the change in autonomous investment.
E)There is an equal effect on real GDP in Economies A and B as a result of the increase in autonomous investment.

Question

Quizplus · Accepted Answer

The multiplier effect in an economy is determined by the marginal propensity to consume (MPC), the net tax rate, and the marginal propensity to import (MPM). Economy B, with a lower net tax rate, will have a larger portion of income available for spending after taxes, leading to a larger multiplier effect and thus a larger increase in real GDP following the increase in autonomous investment.

Consider Two Economies,A and B