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1 answer:
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Answer:
reduction in investment, savings and interest rate
Explanation:
A change in factors other than the interest rate causes a shift in the investment demand curve also known as IS curve. The change in tax law which reduces the demand for investment goods will cause the IS curve to shift left from IS1 to IS2 this will shift the equilibrium from E to E1. This will reduce the real interest rate from R1 to R2. A decrease in interest rate will also decrease the saving from S1 to S2 and Investment is already reduced from I1 to I2.
Note: Graph file is attached
Answer:
(B) $20 billion
Explanation:
Given a certain level of MPC, an increase in government spending (G) by a certain amount translates to an increase in aggregate demand (AD) through the relationship below.
where Δ means <em>change.</em>
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Therefore, given ΔAD of $50 billion, and MPC of 0.6,
=
=
= ΔG = 50 * 0.4 = 20
Therefore, increase in government purchases = $20 billion.