Question

If a war breaks out in the Middle East causing the oil price to go up, then what may happen to the US economy?

a. SRAS curve will shift to the left causing output to decrease and the price level to increase

b. SRAS curve will shift to the right causing output to increase and the price level to decrease

c. AD curve will shift to the right causing the price level to increase

d. None of the above

Liquidity Trap is a situation where:

a. Interest rates are zero

b. Expansionary monetary policy doesn’t work any more

c. Monetary policy cannot stimulate aggregate demand

d. All of the above

Suppose a country is in recession and shifting the AD curve to the right by $500 billion will end the recession. If MPC of the country is 0.75 and there is no crowing out effect, then how much should the country increase its government spending (G)?

a. $100 billion

b. $125 billion

c. $500 billion

d. $250 billion

Answer 1

a) "A"

It will shift the SRAS curve to the left increasing the price level and decreasing the output in the market.

b) "D"

All of the above are true for the liquidity trap that makes the monetary policy ineffective in the market.

c) "B"

by 125 billion because as the MPC is 0.75 the multiplier is 4, any increase in the government expenditure will increase the overall output by 4 times.