The GDP and employment rate in the developing country of Tinseltown have been st

Question

The GDP and employment rate in the developing country of Tinseltown have been steadily falling in the past few years. In oder to bolster domestic employment substantially increased spending and also placed restrictions on imports. On a TV show, a panel of experts discusses the effectiveness of increased government spending. Sam Perotti, Tinseltown's finance minister, claims that the government's actions have been highly effective. The recent increase in consumer spending, he claims, is proof that aggregate demand in the economy has increased. Ethan Bernstein, who is a research analyst does not agree with Sam. He argues that the amount the governemnet should instead encourage individuals to save, which will increase the funds available for investment. According to Laura, the investment level in the economy is much lower than it should be and increasing that would address the real problem. This, she feels, is the fastest route to reviving the economy in the short term. Laura's argument is flawed because: A. She ignores the fact that Tinseltown has seen an increase in consumption spending after the stimulus B. she assumes that an increase in national saving will increase investment. C. she assumes that consumer spending is not a component of aggregate demand. D. she assumes that Tinseltown has an efficient banking system. E. She does not take into account the paradox of thrift.

Explanation / Answer

option B is correct.

she assumes that if people invest more and more, those savings will be convert into long term capital assests and they will provide returns to them. even short investment alternatives also do not provide more benefits rather than long term investments.

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