Question

QUESTION 38 2.5 38. Which of the following describes the way in which the self-correcting mechanism of the economy resolves the problem of a recessionary gap? a) The recessionary gap is cured by an increase in government purchases of goods and services, which implies a shift to the right of the AD curve until full employment equilibrium is reestablished. b) The unemployment associated with a recessionary gap causes wages to fall, increasing Aggregate Supply and thus shifting the AS curve to the right untita full employment equilibrium is reestablished. c) The unemployment associated with a recessionary gap causes a decrease in Aggregate Supply, shifting the AS curve to the left until full employment equilibrium is restored. od) Both (a) and (b) are correct. e) None of the above ООО 2.5 po QUESTION 39 39. What types of circumstances will decrease the effectiveness of Keynesian (stimulus) expansionary policy? o a) When workers and owners of resources act on inflationary expectations. b) When the macroeconomic policy relies on one-time tax rebates, and tax credits conditioned on hiring new employees and buying O new equipment c) When the government budget deficit accompanying the stimulus policy is financed by an increase in income tax. d) When the government budget deficit drives the national debt to levels that causes a debt crisis and an increase in the market rate of interest. e) All the above QUESTION 40 2.5 40. Which of the following were NOT contributing factors to the financial crisis of 2008? O a) Tax cuts implemented in President G. W. Bush's fist term b) Deregulation of banking by the G. W. Bush Administration O c) The G. W. Bush Administration policy of lowering of mortgage lending standards. O d) All of the above O e) Both (b) and (c) Only

Answer 1

Ans. 38. = (Option B) Unemployment associated with Recessionary Gap causes wages to fall, increasing Aggregate Supply and thus Shifting the AS curve to the Right until a full employment equilibrium is achieved.

Recessionary Gap means Real Production is Less Than Full Employment Production. Markets have Surpluses. Labour Unemployment is High. This is corrected automatically in Aggregate Market through the following-

In this Automatic Process the Economy eliminates the Recessionary Gap as Wages Decreases due to Recession -> This results in the Increase of Aggregate Supply -> then Aggregate Supply Curve Shifts to the Right.