Answer:
Determine whether each of the following, other factors held constant, would lead to an increase, a decrease, or no change in the level of real GDP demanded
a. A decrease in government purchases will lead to an increase in the Real GDP demanded.
b. An increase in taxes of (corporate & household) will lead to an increase in the Real GDP demanded.
c. A reduction in transfer payments will lead to a decrease in the Real GDP demanded.
d. A decrease in the marginal propensity to consume will lead to a decrease in the Real GDP demanded.
Explanation:
a. A decrease in government purchases will lead to an increase in the Real GDP demanded. This is because a reduction in government expenses will definitely leave the government with sufficient funds to finance other developmental projects within the economy in the year under consideration.
b. An increase in taxes of (corporate & household) will lead to an increase in the Real GDP demanded. This depicts that if more taxes are paid by household and corporate entities to the government, they are huge sources of revenue to the government to finance all their programmes and projects.
c. A reduction in transfer payments will lead to a decrease in the Real GDP demanded because it is a huge source of spending fro government without direct fiduciary benefits. Transfer payment are payments made or income received in which no goods or services are being paid for, such as a benefit payment or subsidy. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output. Examples of transfer payments include welfare, financial aid, social security, and government making subsidies for certain businesses.
d. A decrease in the marginal propensity to consume will lead to a decrease in the Real GDP demanded because if people have more money to spend, they will have more propensity to consume goods and services, which will lead to economic boost while a decrease in the marginal propensity to consume will produce a counter result.
