Homework Answers
a. With a tax increase on consumer income, disposable income of the households falls. As a result consumption and aggregate demand falls. This will cause AD curve to shift to its left from AD to AD' resulting in lower GDP (output) Y' and price level P' both.
b. With a surge in military spending, aggregate expenditure increases. As a result, AD curve shifts to the right from AD to AD' resulting in higher GDP (output) Y' and price level P' both.
c. With reduction in taxes that increases investment, level of investment rises. As a result, aggregate expenditure increases and AD curve shifts to the right from AD to AD' resulting in higher GDP (output) Y' and price level P'. This is shown in diagram (b).
d. If US government increases its expenditure on healthcare, aggregate expenditure increases and AD curve shifts to the right from AD to AD' resulting in higher GDP (output) Y' and price level P'. This is shown in diagram (b).
Options b, c and increases aggregate demand and thereby can solve the problem of recession. Option a cannot solve recession as here AD falls.
In options b,c and d both price level increases. Thus, these solutions are incapable in solving problem of inflation. Only option a can solve the problem of recession by decreasing price level.
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2. In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices...
1.) In the Keynesian framework, which of the following events might cause a recession? Which might...
1.) In the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers. a.) A large increase in the price of the homes people own. b.) Rapid growth in the economy of a major trading partner. c.) The development of a major new technology offers profitable opportunities for business. d.) The interest rate rises. e.) The good imported from a major trading partner become much less expensive. 2.)...
1. Using the Keynesian framework, which of the following events might cause a recession? Which might...
1. Using the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers for EACH question a-d. a. A large increase in the price of the homes people own. b. Rapid growth in the economy of a major trading partner. C. The development of a major new technology offers profitable opportunities for business. d. The interest rate rises.
1. Assume that there is an increase in government spending Which determinant? ____________ D AD or...
1. Assume that there is an increase in government
spending
Which determinant? ____________
D AD or D AS?
What happens to:
Price Level _______________
Real GDP _______________
Inflation _______________
_______________
Economic Growth _______________
2. Assume that there is an increase in
taxes
Which determinant? ____________
D AD or D AS?
What happens to:
Price Level _______________
Real GDP _______________
Inflation _______________
_______________
Economic Growth _______________
AS AD 0 Real domestic output AS AD 0 Real domestic output
Using the following figure, suppose that a change in fiscal policy shifts AD from AD (1)...
Using the following figure, suppose that a change in fiscal policy shifts AD from AD (1) to AD (2). Which response would be most likely to cause that shift? Choose one of a, b, c, or d. A rise in taxes OR a rise in government spending A rise in taxes OR a fall in government spending A fall in taxes OR a rise in government spending A fall in taxes OR a fall in government spending
Q1- Which of the foloowing will cause the investment-demand curve to shift to the right? A....
Q1- Which of the foloowing will cause the investment-demand curve to shift to the right? A. A decrease in interest rates B. An increase in the cost of labor C. An increase in disposable income D. An increase in expected rate of return Q2- Which of the following represents the use of fiscal policy to achueve economic stimulus? A. Greater government expenditure or lower taxes B. Greater government expenditure or higher taxes C. Lower government expenditure or lower taxes D....
What reference? Name: For each of the following events, use an AD-AS diagram to show the...
What reference?
Name: For each of the following events, use an AD-AS diagram to show the short-run and long-run effects on output and the price level (inflation rate); identify any output gap. Assume the economy starts in long run equilibrium. (1) The government reduces income taxes AS P AD (2) A decrease in consumer confidence leads to lower consumption spending AS P. AD AD-AS practice assignment.pdf 2/2 (3) The Fed decreases the money supply AS Pe K AD y* (4)...
1.Which of the following statements is true according to Keynesian monetary theory? Group of answer choices...
1.Which of the following statements is true according to Keynesian monetary theory? Group of answer choices Stable business expectations means that a decrease in interest rates will increase planned investment. The liquidity trap means that an increase in the money supply may not cause interest rates to fall. Monetary policy is more effective in stimulating AD than fiscal policy. The proper target for setting monetary policy is the supply of money. 2. The money supply has a value of $12...
(1) Which of the following is not a tool of fiscal policy? Government spending Taxes Tax...
(1) Which of the following is not a tool of fiscal policy? Government spending Taxes Tax incentives Private investment (2) Which of the following statements helps to explain why the economy can be slow to recover from a recession? Workers are less motivated because of reduced expectations, which reduces total output. There is not as much money in circulation to fuel new investment. Wages do not fall quickly, which delays an adjustment to a higher output level....
Module 7 Ch.17 Fiscal Policy and AD-AS Graph (4 points on each scenario) This problem is...
Module 7 Ch.17 Fiscal Policy and AD-AS Graph (4 points on each scenario) This problem is adapted and modified from Openstax Ch.17 problem 53. Review ch.11 to 13 about AS-AD, Keynesian, and Neoclassical approaches. 1. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below, and explain why. (2 points) 2. Sketch an AD-AS diagram for each of the situations. Your graph should include the vertical potential GDP, and...
When the government pursued a “tight money” policy during the Great Depression, it caused aggregate demand...
When the government pursued a “tight money” policy during the Great Depression, it caused aggregate demand to decrease because it: Choose one: A. reduced consumer spending and investment spending. B. caused tax rates to decrease. C. led to very high rates of inflation, which eroded household spending. D. caused a rapid decline in exports to other countries. E. led to an increase in stock prices and household wealth.
1. Using the Keynesian framework, which of the following events might cause a recession? Which might cause inflation? Sketch AD/AS diagrams to illustrate your answers for EACH question a-d. a. A large increase in the price of the homes people own. b. Rapid growth in the economy of a major trading partner. C. The development of a major new technology offers profitable opportunities for business. d. The interest rate rises.
1. Assume that there is an increase in government
spending
Which determinant? ____________
D AD or D AS?
What happens to:
Price Level _______________
Real GDP _______________
Inflation _______________
_______________
Economic Growth _______________
2. Assume that there is an increase in
taxes
Which determinant? ____________
D AD or D AS?
What happens to:
Price Level _______________
Real GDP _______________
Inflation _______________
_______________
Economic Growth _______________
AS AD 0 Real domestic output AS AD 0 Real domestic output
What reference?
Name: For each of the following events, use an AD-AS diagram to show the short-run and long-run effects on output and the price level (inflation rate); identify any output gap. Assume the economy starts in long run equilibrium. (1) The government reduces income taxes AS P AD (2) A decrease in consumer confidence leads to lower consumption spending AS P. AD AD-AS practice assignment.pdf 2/2 (3) The Fed decreases the money supply AS Pe K AD y* (4)...
Module 7 Ch.17 Fiscal Policy and AD-AS Graph (4 points on each scenario) This problem is adapted and modified from Openstax Ch.17 problem 53. Review ch.11 to 13 about AS-AD, Keynesian, and Neoclassical approaches. 1. Specify whether expansionary or contractionary fiscal policy would seem to be most appropriate in response to each of the situations below, and explain why. (2 points) 2. Sketch an AD-AS diagram for each of the situations. Your graph should include the vertical potential GDP, and...
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