Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct?
A) Real GDP will fall more in economy A than in economy B.
B) Real GDP will fall more in economy B than in economy A.
C) Real GDP will fall the same in both economies.
D) The effect on the relative size of the reduction in real GDP in the two economies is ambiguous.

Question

Quizplus · Accepted Answer

Economy B, without an unemployment compensation system, will likely see a more significant reduction in consumer spending following the drop in planned investment, as laid-off workers have less financial support to maintain their spending levels. This reduction in consumer spending can lead to a larger fall in real GDP compared to Economy A, where unemployment benefits help to stabilize consumer spending.

Suppose There Are Two Economies That Are Identical in Every