QUESTION 3 Answer the next question using the following graph AS ADI ADs Real do

Question

QUESTION 3 Answer the next question using the following graph AS ADI ADs Real domestic output Refer to the graph. If AD1 represents the current level of expenditures and 02 is the full-employment level of GDP, the government should undertak O an expansionary fiscal policy that reduces aggregate demand to AD2. O an expansionary fiscal policy that reduces aggregate demand to AD3 0 a contractionary fiscal policy that roduces aggregate demand to AD2 O a contractionary fiscal policy that reduces aggregate demand to AD3 QUESTION 4 Which of the following discretionary policies both restrains the growth of government and helps return the economy to full employment? A tax cut in a recession A tax increase during inflation OAn increase in government spending during a recession A decrease in government spending in a recession

Explanation / Answer

Ans:

1) a  contractionary fiscal policy that reduces aggregate demand to AD3

when the aggregate demand is AD1 and Q2  is the full-employment level of GDP, then the current equilibrium real GDP level of Q1 is beyond the economy's capacity to produce and resulting in demand-pull inflation. Contractionary fiscal policy will reduce aggregate demand to AD3.

2) A tax cut in a recession.

In a recession when government spending is decreased it would decrease the size of the government.However, tax cuts in a recession would expand GDP and will also restrain the size of government.

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