Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption. b) It will result in an increase in investment but a decrease in government spending. c) It will lead to an increase in investment and private saving. d) It will decrease investment but increase in public saving.

Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the marginal propensity to consume is less than one). Which of the following may result from the policy change? a) It will lead to an increase in investment but a decrease in consumption. b) It will result in an increase in investment but a decrease in government spending. c) It will lead to an increase in investment and private saving. d) It will decrease investment but increase in public saving.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Sh 13

Economics

Consider a scenario of a closed economy in the short run where price level is fixed. Assume that both
taxes and money supply increase in a way that keep output constant in equilibrium (suppose that the
marginal propensity to consume is less than one). Which of the following may result from the policy
change?
a) It will lead to an increase in investment but a decrease in consumption.
b) It will result in an increase in investment but a decrease in government spending.
c) It will lead to an increase in investment and private saving.
d) It will decrease investment but increase in public saving.

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