A decreased reliance on colonization Increased urbanization 2 points Question 26

Question

A decreased reliance on colonization Increased urbanization 2 points Question 26 WRONG 1. It is a stylized fact that a strong economic expansion tends to lead to... an increase in cyclical unemployment. an increase in the inflation rate. a decrease in wages. a decrease in the labor participation rate. 2 points Question 27 WRONG In the Keynesian model, an increase in government spending leads to an even larger increase in output because... 1. of the multiplier effect. it requires higher tax rates. its budget must remain balanced. higher government debt is always associated with faster growth. points

Explanation / Answer

It is a stylised fact that a strong economic expansion tends to lead to an increase in the inflation rate.

When there will be economic expansion there will be growth in real output and aggregate demand will rise. Because of economic expansion people have more incme and as a result there will be overall rise in demand. If aggregate demand rises more than longrun aggregate supply then immediately there will be rise in price level. So economic expansion will lead to rise in price level. We can describe it with the help of phillips curve. If economic expansion occurs then there will be rise in employment and fall in unemploymeny . If unemployment falls then that should be with the cost of rise in price level.

The economic expansion will not laed to cyclical unemployment, because cyclical unemployment occurs when there is recession in the economy. When cyclical movement toward down then unemploment will rise. With expansion of economy there will rise in wage rate and workforce participation. Because in expansion of economy the employment and wages are relatively higher.

In Keynesian model due to increase in government expenditure there will be larger increase in output because

of the multiplier effect . In Keynsian Economics we all know there is a multiplier effect helps to increase the output more than the increase in government spending. It is true for also for consumption spending and investment spending. This value of government expenditure multiplier depends on MPC(marginal propensity to consume), if MPC be high value of multiplier be high. Government expenditure multiplier also denoted by [1/(1-MPC)].

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