1.According to Keynes, if aggregate income is too high (i.e, an inflationary gap

Question

1.According to Keynes, if aggregate income is too high (i.e, an inflationary gap is developing) the government should use contractionary fiscal policy

a. True

b. False

2. What is the purpose of contractionary fiscal policy?

a. to reduce inflationary pressure

b. to reduce unemployment

c. to increase equilibrium income

d. fiscal policy cannot affect the economy

3. A decrease in the discount rate signals that the Fed wants the money supply expanded

a. True

b. False

4. What is something economists need to know the least in order to effectively fine tune the economy?

a. potential income/output

b.the CPI

c.the multiplier

d.aggregate equilibrium income/output five years ago

Explanation / Answer

1) A -) TRUE.

because a contractionary fiscal policy contract the aggregate demand in the economy and the level of economic activity. and thus result in shift of the aggregate demand curve to the left to reach to the full employement potential level of GDP.

2) A-) to reduce inflationary pressure

3)- A -) TRUE.

because a discount rate is the rate which commerical bank can lend money from fed . thus lower the discount rate enocurages mroe lending from commerical bank and thus money supply will expand.

4) D-) Aggregate equilrbuim income / output five year ago.

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