Question

2A) Aggregate supply shifts to the left when: A. input prices rise. B. producer subsidies are higher. C. inflation expectations are lower D. there is a decrease m burdensome regulations. B) Which of these fiscal policy measures will NOT increase aggregate supply? A. B. C. D. increased infrastructurespending reduced taxes on businesses investment tax credits increase in business regulation Aggregate Ouput C) ff there is a decrease in inputprices, the short-runageregate supply cuve will shift from SRAS to and theprice level wil become A SRASI Po B. SRAS: P C. SRAS2; P D. SRAS2; P2 D) Suppose the economy is in arecession To increase demandusing discretionary fiscal policy the govanment can: A· take interest rates B. raise taxes or shrink goverment spending. C. ending or cut taxes increase government sp cut interest rates D. E) The intent ofcontractionary fiscal policy is to A. fight inflation stemming from an overheatedeconomy. B. fight recessiondue to deficient demand. C. restore the balance of payments. D. balance the federal budget.

Answer 1

2A)

Aggregate supply is the relationship between price level and output of the economy. The aggregate supply curve shift due to any change that increase or decrease production at every price level.

The given options are :

• As input prices rise, the cost of producing the output increases to the firm. Thus they increase their prices to keep profit maximum. Thus, the output at every price level falls and aggregate supply curve shifts to the left.
• If subsidies are higher, the cost of production to the firm reduces and profit rises. Thus the firms increases production at each level of prices SRAS shifts to the right.
• Investment tax credits decreases cost of investment and the firm takes higher level of investment This increases production at each level of prices. The SRAS shifts to the right.
• The decrease in burdensome regulation will reduce the burden of production and increase productivity. This will shift SRAS to the right.

Therefore the correct answer is: A

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B)

The given options are:

• Increase in infrastructure spending increases productivity and shifts aggregate supply to the right or increases aggregate supply.
• Reduced tax on business reduces production costs and increases aggregate supply.
• Investment tax credit increases aggregate supply through reduced costs of production.
• Increase in regulation though creates hindrance to the production process and decrease aggregate supply.

Therefore the correct answer is : D

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C) As input price falls, the cost of production falls. The profir increases, and the firm increases output at each prices. Aggregate supply shift right and price falls.

Therefore the correct answer is : B

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D)

The discretionary policy is to change government spending or taxes to influence the aggregate demand of the economy. When economy is in recession, the output is lower than the potential level and unemployment rises over natural level. To boost up the demand the government takes expansionary policy of increasing spending or cutting taxes. Government spending generates additional spending and boost demand. On the other hand, tax cut increases disposable income and increases consumption and boost demand.

Therefore the correct answer is : C

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E)

The contractionary fiscal policy decreases aggregate demand and control the over heating of the economy. Contractionary fiscal policy increases taxes and decreases government spending to decrease consumption and aggregate demand.

Therefore the correct answer is : A