Question

(1)

Other things being equal, which of the following will increase aggregate expenditures?

Group of answer choices

An increase in domestic prices relative to foreign prices

A decrease in the interest rate

A decrease in real wealth

An increase in income taxes

A decrease in government purchases of goods and services

(2)

If the current unemployment rate is 5 percent and the natural unemployment rate is 6 percent, then the economy is

Group of answer choices

producing a level of Real GDP that is greater than the level of potential Real GDP.

in a recessionary gap.

producing a level of Real GDP that is less than the level of potential Real GDP.

producing a level of Real GDP that is equal to the level of potential Real GDP.

(3)

Which of the following best describes the crowding-out effect?

Group of answer choices

An increase in government expenditures will cause taxes to rise, which will reduce both aggregate demand and output.

An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.

An increase in borrowing by the government will decrease the money supply and, thereby, reduce aggregate demand.

An increase in government expenditures will cause the general level of prices to fall and, thereby, reduce aggregate demand and output.

(4)

The crowding-out effect implies that a

Group of answer choices

budget surplus will be highly effective against inflation.

budget deficit is likely to stimulate aggregate demand and cause inflation.

budget deficit will increase real interest rates and, thereby, retard private spending.

budget surplus will retard aggregate demand and throw the economy into a downward spiral.

(5)

Which of the following statements is true?

Group of answer choices

If crowding out exists, contractionary fiscal policy will cause the aggregate demand curve to shift in by more than indicated by the government spending multiplier.

If the spending multiplier equals 4 and equilibrium real GDP is $20.80 billion below potential real GDP, then total expenditures need to decrease by approximately $5.20 billion to close the recessionary gap.

If spending multiplier equals 5, then an initial change in government spending of $10 million will result in a total change in equilibrium real GDP of $15 million.

In general, autonomous spending increases have a lower multiplier effect on real GDP when the economy is open to international trade.

Answer 1

Ans 1: A decrease in the interest rate. (It raises the investment spending which will increase the aggregate expenditure in the economy)

Ans 2: Producing a level of Real GDP that is greater than the level of potential Real GDP. (Inflationary gap)

Ans 3: An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending. (It causes the interest rate to rise which decrease private investment).

Ans 4: Budget deficit will increase real interest rates and, thereby, retard private spending. (It raises the interest rates which reduces private investment).

Ans 5: In general, autonomous spending increases have a lower multiplier effect on real GDP when the economy is open to international trade. (The value of multiplier for open economy is small compared to the multiplier of the closed economy).