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Suppose that every additional four percentage points in the investment rate (I ÷ GDP) boost economic growth by one percentage point. Assume also that all investment must be financed with consumer saving. The economy is now assumed to be fully employed at
If the goal is to raise the economic growth rate by 1 percent,
a. By how much must investment increase? $ billion
b. By how much must consumption decline for this to occur?

Respuesta :

okpalawalter8

For questions a, b

  • An additional $320 billion in spending is required.
  • Reduced consumption of $320 billion is needed for this to occur.

By how much must investment increase?

Generally, the equation for the investment accounts is  mathematically given as

x=($1tri / $8 tri) * 100

x= 12.5%

Now we know that the answer lies in the fact that the investment rate may be increased by 4% for every 1% rise in economic growth.

Therefore,

=($8 trillion * 0.165%)

=$1.32 trillion

The additional investment is 3.2% of GDP.

Therefore, an increase in investment of ($1320 - $1000) billion is needed to raise GDP growth by 1 percentage point.

This means an additional $320 billion in spending is required.

(b).

In conclusion, Since we were already aware that we would need to cut down on our spending in order to make this investment, we may conclude that:

Reduced consumption of $320 billion is needed for this to occur.

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