Question #65042

1)with the aid of a diagram, explain how an increase in Government spending in a closed economy will affect: the rate of interest; investment; private saving; and national saving.
2)Erehwon is a closed economy that consumes all the goods it produces. In 2016 it produces 50 apples at $1 each and 50 bananas at $1 each. Then in 2017 cold weather causes apple production to double and the price of apples to halve, and banana production to halve and the price of bananas to double. Calculate the percentage change in: nominal GDP; real GDP; the GDP deflator; the CPI.

Expert's answer

1) An increase in government spending in a closed economy will cause the decrease in rate of interest, the increase in investment; the decrease in private saving and decrease in national saving.

2) If Erehwon is a closed economy, which in 2016 produces 50 apples at $1 each and 50 bananas at $1 each, and if in 2017 cold weather causes apple production to double and the price of apples to halve, and banana production to halve and the price of bananas to double, then there will be no change in nominal GDP, real GDP, the GDP deflator and the CPI, because the total sum of goods produced will not change.

2) If Erehwon is a closed economy, which in 2016 produces 50 apples at $1 each and 50 bananas at $1 each, and if in 2017 cold weather causes apple production to double and the price of apples to halve, and banana production to halve and the price of bananas to double, then there will be no change in nominal GDP, real GDP, the GDP deflator and the CPI, because the total sum of goods produced will not change.

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