17. When is a contractionary fiscal policy appropriate? A. During a mild recessi

Question

17. When is a contractionary fiscal policy appropriate? A. During a mild recession B. When there is a danger that the economy might suffer deflation C. When the price level is stable D. When unemployment is below the natural rate 18. What did Keynes say we should do to end a recession? A. Rely on consumers to increase spending B. Wait for wages to fall and the aggregate supply curve to shift to the right C. Rely on firms to increase investment D. Rely on the government to increase spending 19. At point A, what is happening to Aggregate purchases inventories? A. Inventories are increasing B. Inventories are shrinking C. Planned inventories are equal to actual inventories D. It is impossible to predict 45° GDP 20. A basic conclusion of Keynesian analysis is that: A. Changes in business investment are the only type of spending changes that can cause macro disturbances B. The economy will self adjust to the natural rate of unemployment C. The aggregate supply curve is vertical D. The economy does not self adjust to reach full employment or a stable price level 21. According to Classical theory, what should the government do if the economy goes into a recession? A. Increase government spending to increase aggregate demand B. Reduce the price level to encourage consumption C. Nothing; the economy will adjust back to potential GDP by itself D. Hire more classical economists to run things 22. In the situation shown, what are automatic stabilizers doing to aggregate demand? Price level AS A. Increasing it B. Decreasing it C. Keeping it unchanged AD Pot. Real GDP GDP

Explanation / Answer

(17) (D)

In this case the economy has an inflationary gap which can be closed by contractionary fiscal policy.

(18) (D)

Keynes proposed active government intervention to economic shocks.

(19) (B)

Aggregate spending is higher than real GDP, so firms are depleting inventory.

(20) (D)

Keynes proposed active government intervention to economic shocks.

(21) (C)

Classical economists claim that the economy automatically adjusts to shocks.

(22) (B)

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