Re: isi

Posted by lovekesh on May 06, 2012; 1:02pm
URL: http://discussion-forum.276.s1.nabble.com/isi-tp7530027p7532293.html

since group 1 income is fixed, but group 2 income depends on overall GDP. when group1 receives money as transfer, they spend it on consuming domestic goods. What you are missing here is the pullback effect of consumption on domestic goods. This increase in demand from group1 with xtra money and restriction to spend on imports raises the overall income of the country which benefits them and compensates upto somelevel for their loss of 100. Since Group1 likes to consume, it will have a greater multiplier effect as compared to if it were spend by group2. In part c , they are allowed to spend on imports which leaves the country's GDP and GDP is lower in last part.