The figure to the right illustrates the dynamic AD-AS model LRAS1 LRAS2 Suppose
ID: 1207518 • Letter: T
Question
The figure to the right illustrates the dynamic AD-AS model LRAS1 LRAS2 Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD2 to AD1 policy and reach equilibrium (point C) in the second SRAS1 SRAS2 103 100 OA. Increase taxes OB. Increase government spending Oc. Open market purchase of government securities OD. All of the above AD2, (policy) AD2 AD1 14.314.4 Real GDP (Strillions)Explanation / Answer
The government policy to deliberately influence the aggregate demand in the economy through changes in taxes or government spending or some combination of both is called the discretionary fiscal policy. The fiscal policy that increases aggregate demand by increasing government expenditure or by cutting the taxes or both is called the expansionary fiscal policy. If the policy decreases the aggregate demand by increasing the taxes or decreasing government expenditure, it is called contractionary fiscal policy.
The Fed in order to correct any imbalances in the economy changes the money supply to influence aggregate demand. The fed in order to increase the money supply increases federal funds rate, discount rate, decreases reserve requirement, or conduct an open market purchase. These are called expansionary monetary policy. On the other hand, fed in order to decrease the money supply decreases federal funds rate, discount rate, increases reserve requirement, or conduct an open market sell. These are called contractionary monetary policy.
Therefore, the correct option is
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The multiplier is the change in output due to change in autonomous expenditure. Howver due to rising supply the increase in real GDP due to increase in autonomous expenditure does not show the full effect of the multiplier. The real GDP increases smaller than it would have been with horizontal supply curve or constant prices.
Therefore, the correct option is
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The crowding out effect refers to the theory that government borrowing increases the interest rate thus lowering the consumption by household and investment spending by firms. If the government increases its purchase, the aggregate demand and real GDP in the economy increases. The increased spending will encourage consumer and firm to spend and buy more. The consumer and the firm will need more money for this additional buying and spending. The demand for money will increase in the economy. The increased demand for money drives up the interest rate in the economy. Thus the individual and firm decrease its investment due to higher interest rate. As investment decreases real GDP also decline. The impact of the increased government spending will be less than predicted by the multiplier theory.
Therefore, the correct option is
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The correct option is:
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