Economics question??????

Question

I. It takes time for the multiplier to work. The impact of an independent change in investment during the first six

months will be considerably smaller than the multiplier analysis implies.

II. When the marginal propensity to consume is 0.8, an independent increase in investment of $10 billion will cause

the aggregate income of a fully employed economy to rise to $50 billion.

III. The multiplier effect may be even larger over time as its effect is supported by the interest rate and foreign

purchases effect.

A. I, II, and III are all true

B. I is true, II and III are false

C. I and II are true, III is false

D. I and III are true, II is false

E. I, II, and III are all false

Answer 1

C. I and II are true, III is false

I: - True - there is lag in time between cause and effect for investments(so B&E are false but A&C&D might be true)

II: - True (so B&D&E are false, but A&C might be true)

For simple Keynesian cross economy:

ΔY/ΔI=1/(1-MPC) = 1/(1-0.8) = 1/0.2 = 5

ΔI=10

ΔY=10*5=50

III: - False. (so A&D are false but B&C&E might be true)

Summing up we conclude that there only C left.

Truth table will look following:

Q ...A ...B ...C ...D ...E

..I....T ....F ...T ...T ....F

.II....T ....F ...T ...F ....F

.III...F ....T ...T ...F ....T

Only C column has True values.