The fictional country of Alpetra increases the income tax rate so that tax revenues increase by $30 million.In response,consumption falls by $8 million.If GDP and government spending remains the same and Alpetra is a closed economy,what is the change in investment?

Question

The fictional country of Alpetra increases the income tax rate so that tax revenues increase by​ $30 million.In response,consumption falls by $8 million.If GDP and government spending remains the same and Alpetra is a closed economy,what is the change in investment?

Quizplus · Accepted Answer

In a closed economy, GDP = Consumption + Investment + Government Spending. Since GDP and government spending remain the same, the decrease in consumption by $8 million must be offset by an increase in investment by $8 million to keep GDP constant.

The Fictional Country of Alpetra Increases the Income Tax Rate