Question

Suppose a decrease in aggregate demand shifts the economy from equilibrium to P4 and Y1. LRAS Price Level AD Y Y* Real GDP a. Which of the following events would likely cause the decrease in aggregate demand? Personal consumption falls as workers become concerned about future employment prospects. Gross Investment Increases as capital units become fully utilized. Imports decrease due to Increased foreign prices b. A decrease in aggregate demand is of policy concern due to the increase in the unemployment rate. productivity of workers. price level. c. Which policy action should the federal government enact? Decrease real Interest rates Increase government spending on Infrastructure Increase personal Income tax rates d. What should determine the size of the policy action? The policy action should equal the difference between Y* and Y1 The policy action should be less than the difference between Y* and Y1 The policy action should be greater than the difference between Y* and Y4.

Answer 1

A.Aggregate demand can fall as a result of fall in personal consumption as AD is directly related to consumption.

Answer-First option.

B.A decrease in AD reduces output and a fall in output increases unemployment rate.

Answer-First option.

C.To increase AD and increase employment,the government should use expansionary fiscal policy-reducing tax rate and increasing government spending.

Answer-Second option.

D.The size of the policy action should be more than the difference between Yo and Y1 as crowding out does not let the output increase by the amount of increase in government spending.

Answer-Last option