Euphrasia, a mixed open economy, was severely affected by a recession that almos

Question

Euphrasia, a mixed open economy, was severely affected by a recession that almost paralyzed its service sector. The Euphraisian government announced a fiscal stimulus package of 15000 billion to boost economic growth. GDP of the economy was expected to increase by 2.5 percent during the following year after the implementation of the fiscal stimulus package, it was observed that instead of increasing, the GDP of Euphraisia actually declined by 0.75 percent that year. Which of the following, if true, will explain this outcome? A. one of Euphraisia's neighboring countries, which is a closed economy, experienced a sudden decline in output and prices. B. Oil imports declined as countries exporting oil reduced supply. C. A NUMBER OF PUBLIC SECTOR ENTERPRISES IN eUPHRAISIA WERE PRIVATIZED. D. Euphraisia's population increased by4.5percent that year. E. The gross saving rate in the economy declined during that year.

Explanation / Answer

B. Oil imports declined as countries exporting oil reduced supply.

Decrease in the supply of oil by the other country affects the domestic output of home country. Due to this reason, when oil exporting countries reduces its supply in the Euphrasia then the production of goods which require oil reduces and as a result, the GDP of Euphraisia declined by 0.75% rather than increasing.

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