Question

Answer True or False.

A 1 If (Y) is the product of the economy, (C) the consumption, (Ιp) the desired investment, ΔΙs the unwanted change of reserves, and there is no public sector, then the balance is given by the relation Y = C + Ip + ΔΙs.

A 2 The investment multiplier shows us how income changes when autonomous investments change and depends positively on the marginal propensity for consumption.

A 3 When the economy balances on a "liquidity trap", pursuing an expansionary fiscal policy will increase equilibrium income, but will not affect the equilibrium interest rate.

A 4 The provision of services without the issuance of documents is one of the reasons for the devaluation of GDP.

Answer 1

A.1) The given statement is true.

According to the given statement, the product of an economy is given as the sum of consumption, investment and unwanted change of reserves. The product in an economy can be referred to as the GDP in general. Thus, comparing with the equation of GDP, we can say that

GDP = Private consumption + gross investment + government investment + government spending + [Exports-imports]

Thus, in comparison with the given equation, the above equation holds good and it can be said that the given statement is true.

A.2) The given statement is true

The investment multiplier states that any increase in the public or private investment spending would have an impact on the aggregate income of an economy which is more than proportionate. The larger values of investment multiplier mean that it is more efficient in the creation and the distribution of wealth in the economy. It is also evident that the investment multiplier depends on the marginal propensity to consume and on the marginal propensity to save.

Thus, the given statement that the investment multiplier shows how the income changes when the autonomous investment changes and depends on the marginal propensity to consume is thus correct.

A.3) The given statement is false.

A liquidity trap refers to an economic situation where the monetary policy becomes ineffective due to lower interest rates and the increased preference of the consumers to save rather than invest in higher yielding bonds. In such a situation, the expansionary monetary policy would have no effects on the income and also the interest rates as all the monetary policy measures would become ineffective at such situations. Hence the given statement is true.

A.4) The given statement is true

GDP refers to the total value of goods and services within a country. Devaluation refers to the deliberate downward adjustment. GDP is calculated by considering the available data of the goods and services and only the final goods and services are taken in to consideration. When proper documents are not provided in the provision of services, such services would not be counted in a country’s GDP and hence it would lead to devaluation of GDP. Hence the given statement is true.