Question

7. Effects of an active or passive policy 

The following graph shows the aggregate demand curve (AD), the short-run aggregate supply curve SRAS), and the long-run aggregate supply curve (LRAS) for a hypothetical economy. 

Suppose the economy is in short-run equilibrium. The _______ of $4 trillion drives unemployment _______ the unemployment rate consistent with full-employment output. 

Suppose public officials are concerned about the $4 trillion gap in the economy and the resulting lower-than-expected aggregate demand. The government has decided to follow an active approach to policymaking. 

On the following graph, shift the AD curve, the SRAS curve, or both to show the intended effect of this approach.

 Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. 

Which of the following policies would advocates of an active approach choose to close the gap found on the initial graph? Check all that apply. 

• An increase in the money supply 

• An increase in government spending 

• A decrease in taxes 

• An increase in the reserve requirement set by the Federal Reserve
  

1.) (recessionary or inflationary)

2.) (below or above)

Answer 1

1) actual short run real GDP=12 trillion and there a recessionary gap of $4 trillion Drives unemployment above natural rate of unemployment.

in order achieve potential output of $16 trillion, AD shifts to the right. AD shifts right by $8 trillion

mcq answers, Option 2 and 3rd are correct

Answer 2

Suppose the economy is in short-run equilibrium. The recessionary gap.of $4 trillion drives unemployment above the unemployment rate consistent with full-employment output.

Shift SRAS to the right along the AD line

A decrease in taxes

An increase in government spending

An increase in the money supply