Question

1. Suppose the federal government observes a decrease in net exports. Examine this event in terms of the aggregate demand and aggregate supply model.

    a. The decrease in net exports will cause  (Click to select) [a decrease in short-run aggregate supply / an increase in short-run aggregate supply / an increase in aggregate demand / a decrease in aggregate demand].

    b. This will lead to  (Click to select) [a decrease / an increase] in the price level and  (Click to select) [an increase / a decrease] in real GDP.

    c.  (Click to select) [Contractionary / Expansionary] fiscal policy will be used to  (Click to select) [reduce inflation / reduce unemployment].

    d. The fiscal policy actions may include  (Click to select) [an increase / a decrease] in taxes and/or  (Click to select) [an increase / a decrease] in government purchases.

    e. The goal of fiscal policy is to  (Click to select) [maintain zero inflation / smooth out business cycles / maintain zero unemployment].

2. 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) [an increase in aggregate demand / a decrease in short-run aggregate supply / an increase in short-run aggregate supply / a decrease in aggregate demand].

    b. This will lead to  (Click to select) [a decrease / an increase] in the price level and  (Click to select) [a decrease / an increase] in real GDP.

    c.  (Click to select) [Expansionary / Contractionary] fiscal policy will be used to  (Click to select) [reduce inflation / reduce unemployment].

    d. The fiscal policy actions may include  (Click to select) [a decrease / an increase] in taxes and/or  (Click to select) [an increase / a decrease] in government purchases.

    e. The goal of fiscal policy is to  (Click to select) [maintain zero unemployment / smooth out business cycles / maintain zero inflation].

3. In which instance would "crowding out" likely become a concern?

a. A balanced budget law prevents the government from taking fiscal action during a recession.

b. Prior-year budget surpluses allow the government to use saved funds to reduce taxes.

c. In order to increase spending on infrastructure, the federal government decides to borrow funds.

4. What becomes more difficult if "crowding out" occurs due to fiscal action?

a. Purchasing stocks and other financial investments

b. Making economic investments

c. Saving income for future purchases

Answer 1

1 a) a decrease in aggregate demand.

b) a decrease, a decrease

c) expansionary, reduce unemployment

d) a decrease, an increase

e) maintain zero unemployment