Suppose that investment increases by $10 billion.Which one of the following would reduce the effect of this increase in autonomous expenditure on equilibrium real GDP in the short run?
A)a flatter short- run aggregate supply curve
B)a decrease in the marginal propensity to import
C)a decrease in the marginal tax rate
D)a steeper short- run aggregate supply curve
E)an increase in the marginal propensity to consume

Question

Quizplus · Accepted Answer

A steeper short-run aggregate supply curve means that any increase in autonomous expenditure will result in a smaller increase in equilibrium real GDP. This is because the steeper the curve, the less responsive output is to changes in aggregate demand. Choices A, B, and E are all factors that would increase the responsiveness of output to changes in aggregate demand, therefore amplifying the effect of the increase in investment on equilibrium real GDP. Choice C may increase aggregate demand, but it would not directly affect the responsiveness of output to that demand.

Suppose That Investment Increases by $10 Billion