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In real life, the operation of simple multiplier is affected by many leakages. Leakages in the multiplier arise out of the following reasons:(1) Saving: If all the income is spent on consumption, then every increase in investment will raise the level of income. But, if a large proportion of the income is kept as saving, it will certainly have different effect on the intensity of multiplier.(2) Debt Cancellation: If the people use a large proportion of their income in debt repayment, they will have smaller amount of income left for consumption. As a result, marginal propensity to consume falls and the value of multiplier also goes down.(3) Imports: If the imports of a country exceed its exports a large portion of the national income will go to foreigners. Consequently, the multiplier effect of this expenditure is transmitted abroad. In such a situation, any increase in the investment will not increase the level of income in the economy.(4) Price Inflation: When the economic reaches the full employment level or very close to it, every increase in investment will bring about a simultaneous increase in the price level. A large portion of incremental income will be spent in buying costly things; therefore, the intensity of multiplier becomes weak.(5) Liquidity preference: People keep a part of their money income in liquid form. Liquidity preference reduces the present level of consumption of the community; as a result, the multiplier loses its strength.
Q. Investment demand of the AS-AD model? Investment demand. As long as we keep nominal interest rate (and thus real interest rates) constant, there is no reason for demand for
Determine the term - hot money A large 'hot money' inflow shifts the demand curve for currency to the right, leading to exchange rate rising and to an overvalued exchange rate
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If two countries had the same initial level of real GDP per capita, and Country A grows at 2.8 percent, while Country B grows at 3.5 percent, how will their real per capita GDP lev
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how does economy works?
This problem is based on the Ricardian Model. Assume that 2 countries, Stormlands and Reach, use White Walkers' labor to produce 2 goods, lumber and wheat.
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The marginal approach to profit maximization means that a firm should produce until a. marginal revenue equals zero b. marginal revenue equals marginal costs c. marginal cost becom
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