Question

Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model. a. The increase in gross investment will cause (Click to select) b. This will lead to (Click to select)in the price level and (Click to select) in real GDP IClick to select) fiscal policy will be used to (Click to select) C. d. The fiscal policy actions may include (Click to select) in taxes and/or [(Ciek to select) in government purchases. e. The goal of fiscal policy is to Click to select)

Answer 1

Investment is a part of aggregate demand

a) increase in gross investment will cause aggregate demand to shift to the right because aggregate demand increases

b) this will lead to an increase in the price level and an increase in the real GDP

c) to counter this expansionary phase, contractionary fiscal policy will be used to decrease the aggregate demand and eliminate the inflationary gap. This will bring aggregate demand back to its original position

d) this fiscal policy action may include increase in the taxes or decrease in government purchases

e). The goal of the fiscal policy is to eliminate the inflationary gap and to bring the economy back to its full employment level