Question

1.

The graph below shows an economy in macroeconomic equilibrium. Suppose the government decreases spending in an attempt to reduce inflationary pressures. All else equal, illustrate the effect of this contractionary fiscal policy on macroeconomic equilibrium. Provide your answer below: Price Level Aggregate Supply Aggregate Demand Real GDP

2.

If the Fed wants to reduce the money supply through open market operations, it will

Select the correct answer below :

sell bonds

buy bonds

Oreduce the required reserves ratio

reduce the discount rate

3.

A growing debt/GDP ratio could mean that, all else the same,

Select the correct answer below:

the government is running large budget deficits

the government is paying down the debt

government expenditures are less than tax revenues.

the economy is in a growth stage

4.

In order to be usable as money, a commodity has to have these characteristics:

Select the correct answer below.

be an acceptable method of payment for buyers and sellers

have a way to preserve its value for later use

be a unit of account, or be a ruler by which we measure values

all of the above

5.

Answer 1

Question 1

It has been stated that government has reduced its spending in an attempt to reduce inflationary pressures.

Government spending is a component of the aggregate demand.

A decrease in government spending will result in a decrease in the aggregate demand.

When aggregate demand decreases, the aggregate demand curve shifts to the left.

Following is the required graph -

The above figure shows that administration of the contractionary fiscal policy by the government in terms of decrease in government spending has resulted in the leftward shift of the aggregate demand curve.

This has resulted in a decrease in equilibrium price level and real GDP.

Thus,

The contractionary fiscal policy results in a decrease in price level and real GDP.