1) Which of the following is true? a) A recessionary gap cannot be closed comple

ID: 1152863 • Letter: 1

Question

1) Which of the following is true?

a) A recessionary gap cannot be closed completely because of sticky wages.

b) Empirical studies show that a recessionary gap can be closed automatically and quickly.

c) Wages decrease dramatically in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.

d) Firms do not tend to reduce wages by much during a recession because they are afraid of losing their best workers.

e) Both a and d.

1.1) Which of the following is true?

a) The multipliers of the government expenditures and taxes are easily calculated by the government.

b) Fiscal policy is usually successful because the government can control most economic variables.

c) Fiscal policy cannot fix the economy overnight because tax and spending policies affect aggregate demand after some time.

d) Consumer spending immediately reacts to income tax cuts.

2) An inflationary gap can theoretically close on its own because.

a) Aggregate supply will gradually shift to the right as input prices decrease in the time of inflation.

b) Aggregate demand will gradually shift to the right as input prices decrease in the time of inflation.

c) Aggregate demand will gradually shift to the left as input prices increase in the time of inflation.

d) Aggregate supply will gradually shift to the left as input prices increase in the time of inflation.

e) None of the above.

3) Which of the following is true?

a) A recessionary gap can be closed completely because of sticky wages.

b) Theoretically, an inflationary gap can eventually lead to stagflation.

c) Wages increase in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.

d) a and b.

4) Which of the following is true?

a) In our simple model of aggregate demand the government expenditures multiplier is smaller than the tax multiplier.

b) The tax multiplier is negative suggesting that a reduction in taxes decreases our equilibrium output.

c) The tax multiplier is positive but smaller than the government expenditures multiplier.

d) None of the above.

Ans

Both a and D are right. Wages being sticky and not firing staff do not result in full output situation

2 c is right. There is effectiveness lag

3 D is right. It is theoretically possible but often does not happen in reality

4 b is right. C is not right as it doesn't mention real wages

5 none of the above is right. Tax multiplier is negative and Govt expenditure multiplier is greater

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