Consider two economies,A and B.Economy A has a marginal propensity to consume of 0.9,a net tax rate of 0.2 and a marginal propensity to import of 0.2.Economy B has a marginal propensity to consume of 0.7,a net tax rate of 0.2 and a marginal propensity to import of 0.2.Suppose there is an increase in autonomous investment of $5 billion in each of these economies.Which of the following statements is true?
A)The AD curve shifts farther to the left in Economy B than Economy A.
B)The AD curve shifts farther to the right in Economy A than Economy B.
C)The AD curve shifts to the left the same amount in both economies.
D)The AD curve shifts to the right the same amount in both economies.
E)The simple multiplier is larger in Economy A.

Question

Quizplus · Accepted Answer

The simple multiplier is larger in Economy A due to its higher marginal propensity to consume, leading to a larger rightward shift in the AD curve compared to Economy B.

Consider Two Economies,A and B