QUESTION 25 Figure 16-2 Price level (GDP deflator 2000 100) LRAS LRAS SRAS SRAS2

Question

QUESTION 25 Figure 16-2 Price level (GDP deflator 2000 100) LRAS LRAS SRAS SRAS2 102 100 AD, 10.0 10.8 11.0 Real GDP (trillions of 2000 dollars) / 2 Refer to Figure 16-2. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most ikely pursue O expansionary fiscal policy. O contractionary automatic stabilizers. O expansionary monetary policy. O contractionary monetary policy. O contractionary fiscal policy.

Explanation / Answer

Remember in fig 16.2 AD shifts rightwards meaning more demand and As rises to meet New AD at B. Now this will happen by expansionary policy. Expansionary policy is of two types. Fiscal policy(expansionary) -determined by Congress and president and monetary (expansionary) policy determined by Federer reserve. Since the first question talks about Congress and president- it will be expansionary fiscal policy

Fig 14.6 Answer is expansionary monetary policy

C crowding out results when private supply is reduced due to higher interest rate resulting from higher govt expenditure. The answer is A to B since interest rate is here higher and supply is lower

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