Question

Suppose that society decided to increase consumption and reduce investment. Less investment leads to economic growth in the long run. Which of the following statements are true about groups in society that would benefit from or be hurt by this change? Check all that apply. There might be a transition period in which workers and owners in investment-goods industries would receive lower incomes. There might be a transition period in which workers and owners in consumption-goods industries would receive higher incomes. All groups will have higher incomes as the result of faster economic growth.

Answer 1

Answer:

Option (b) is correct.

Explanation:

(a) Consumption expenditure is the expenditure on goods and services by the consumers in an economy.

Investment expenditure is the expenditure on the capital goods by the firms in an economy.

Both have a different effect on the gross domestic product if an investment expenditure decreases and consumption increases. GDP of a nation will increase if there is an increase in the consumption level and it falls if there is a decrease in the investment expenditure.

However, decrease in the investment expenditure will result in lower productivity because if there is a reduction in the investment expenditure then less amount will be spent on capital goods and labor's productivity and this will lead to reduce the growth of GDP in both the sectors, investment goods and consumption goods.

Therefore, reduction in the investment expenditure will lead to slower the economic growth in the long run.

(b) As the consumption in an economy increases, this will lead to increase the production of consumption goods. So, this would increase the benefits of the owner. Due to this increased production, the demand for labor also increases by the firms. Therefore, this would benefit the labors in the consumption goods sector.