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Evaluate this statement: “The U.S. economy could achieve greater growth by devoting fewer resources to consumption...

Evaluate this statement: “The U.S. economy could achieve greater growth by devoting fewer resources to consumption and more to investment; it follows that such a shift would be desirable.”

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Answer #1

The statement is correct.If the government increases consumption then aggregate demand rises by the amount of the rise in consumption.However,if resources are devoted to increasing investment then aggregate demand increases by multiplier times.This is due to investment multiplier.

K(Investment multiplier)=1/1-MPC.

MPC=Marginal propensity to consume.

Therefore,a rise in investment causes the output of an economy to rise by multiple times.Thus,the government should invest in increasing investment.

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