Question

Consider an economy described by the following equations:

Answer 1

Answer: Please refer to Explanation

Explanation:

The question requires that of the components of the GDP equation, we state which ones fall under the given statements.

a. It is an autonomous amount, independent of other factors.

- G and T. In other words Government Purchases and Taxes.

These are independent of other factors and are set by the government based on what it views as needed by the Economy. They are independent of Consumption and Investment.

b. It is a function of disposable income.

- Consumption.

The amount of money that people consume in an Economy is based on their Disposable Income which is the amount left from their income after they pay taxes. If they have a higher disposable income , they'll consume more and vice versa.

c. It depends on the interest rate.

- Investment

Investment relies heavily on interest rates because it determines whether people will invest their savings or not. If interest rates are higher, there is a chance to make more so more people invest but at the same time a lower rate means that more capital projects are accomplished because the cost of borrowing is less. This shows that Interest rates have a huge influence on investment.