Question

1. Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model.

    a. The increase in gross investment will cause  (Click to select) [an increase in aggregate demand / a decrease in short-run aggregate supply / an increase in short-run aggregate supply / a decrease in aggregate demand].

    b. This will lead to  (Click to select) [a decrease / an increase] in the price level and  (Click to select) [a decrease / an increase] in real GDP.

    c.  (Click to select) [Expansionary / Contractionary] fiscal policy will be used to  (Click to select) [reduce inflation / reduce unemployment].

    d. The fiscal policy actions may include  (Click to select) [a decrease / an increase] in taxes and/or  (Click to select) [an increase / a decrease] in government purchases.

    e. The goal of fiscal policy is to  (Click to select) [maintain zero unemployment / smooth out business cycles / maintain zero inflation].

2. In which instance would "crowding out" likely become a concern?

a. A balanced budget law prevents the government from taking fiscal action during a recession.

b. Prior-year budget surpluses allow the government to use saved funds to reduce taxes.

c. In order to increase spending on infrastructure, the federal government decides to borrow funds.

3. What becomes more difficult if "crowding out" occurs due to fiscal action?

a. Purchasing stocks and other financial investments

b. Making economic investments

c. Saving income for future purchases

Answer 1

Question 1

Gross investment is a component of aggregate demand.

So, an increase in the gross investment leads to an increase in aggregate demand.

Given the short-run aggregate supply, an increase in the aggregate demand leads to increase in the price level and real GDP.

Increase in price level creates inflationary conditions in the economy.

When inflationary pressure in the economy exists then government uses contractionary fiscal policy.

This includes increasing taxes and/or decreasing government purchases.

This policy will help government in fighting business cycle fluctuations.

So,

a. The increase in gross investment will cause an increase in aggregate demand.

b. This will lead to an increase in the price level and an increase in real GDP.

c. Contractionary fiscal policy will be used to reduce inflation.

d. The fiscal policy actions may include an increase in taxes and/or a decrease in government purchases.

e. The goal of fiscal policy is to smooth out business cycles.

Note -: As HOMEWORKLIB Answering Policy, in case of multiple questions being posted, 1st question is answered with elaborate explanation.