Question

In a classical model with fixed factors of production and flexible prices, the amount of consumption spending depends on _____ , the amount of investment spending depends on _____, and the amount of government spending is determined _____. A) the interest rate; disposable income; by tax revenue B) the real wage; the real rental price of capital; by factor prices C) labor's share of output; capital's share of output; by the interest rate D) disposable income; the interest rate; exogenously

Answer 1

Answer: Option (D) is correct.

Explanation:

The amount of consumption spending depends upon the disposable income. If the tax paid by consumer decreases then this will increase the disposable income, as a result consumer spent more on consumption.

The investment spending depends upon the interest rate. We know that there is a inverse relationship between the interest rate and investment spending. If there is reduction in the interest rate then as a result investment spending increases.

Government spending is largely depends on the revenues it generated.

If government collects higher revenue then as a result there is an increase in the government spending.