Consider a simple macro model with demand-determined output.Which of the following parameters will produce the most stable real GDP in the face of autonomous expenditure shocks?
A)MPC = 0.8,t = 0.2,m = 0.3
B)MPC = 0.7,t = 0.3,m = 0.2
C)MPC = 0.7,t = 0.1,m = 0.4
D)MPC = 0.9,t = 0.2,m = 0.4
E)MPC = 0.8,t = 0.1,m = 0.2

Question

Quizplus · Accepted Answer

In a demand-determined output model with autonomous expenditure shocks, the more stable real GDP is achieved when the MPC is lower, the tax rate is higher, and the marginal propensity to import (m) is lower. 
Option C has a relatively lower MPC, higher tax rate, and lower marginal propensity to import compared to the other options, which would make it the best choice for achieving stability in real GDP in the face of autonomous expenditure shocks.

Consider a Simple Macro Model with Demand-Determined Output