Question

1.The Aggregate Supply curve shows which of the following relationships:

the inverse relationship between the price level and real income

the positive relationship between the price level for goods and domestic output

the combinations of income and the interest rate for which the demand for money equals the money supply

2.When a central bank buys long-dated government securities, it is most likely trying to do which of the following?

reduce consumption and borrowing to lower inflation and growth

reduce the money supply

increase consumption and borrowing to stimulate growth and inflation

3.Which statement regarding fiscal surpluses is most reasonable?

Easy fiscal policy works together with tight monetary policy to stimulate the economy

Higher government surpluses may be contractionary

Government surpluses do not affect the level of economic activity

Answer 1

1.

Ans: The positive relationship between the price level for goods and domestic output.

Explanation: AS curve can be defined as relationship between average price level and domestic output level such that labour market is in equilibrium. Rise in average price level acts as an incentive to producers causing higher output production levels.

2.

Ans: Increase consumption and borrowing to stimulate growth and inflation.

Explanation: By buying government securities, central bank is injecting money in economy and in hands of individuals in order to stimulate consumption, growth and inflation.

3.

Ans: Higher government surpluses may be contractionary.

Explanation: Since government expenditure(G) is a part of Aggregate demand, rise in G causes rise in AD. Presence of fiscal surpluses imply that either tax revenues have been greater or G has been lower. Lower G implies lower AD. Hence, contractionary.

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