Question

Suppose a decrease in aggregate demand shifts the economy from equilibrium to P4 and Y1 LRAS (130, 100) Price Level 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.

• Imports decrease due to increased foreign prices.

• Gross investment increases as capital units become fully utilized.

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?

• Increase personal income tax rates

• Decrease real interest rates

• Increase government spending on infrastructure

d. What should determine the size of the policy action?

• 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 Y₁.

• The policy action should equal the difference between Y* and Y₁.

Answer 1

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