Indicate whether the following statements are true or false. 1. Crowding out occ
ID: 1117015 • Letter: I
Question
Indicate whether the following statements are true or false.
1. Crowding out occurs when foreign entities buy and bid up the prices of domestic bonds and this reduces domestic real investment.
2. All else equal, if the wages of workers falls substantially (say because a legal change) the short run aggregate demand shifts left, but the short run aggregate supply will not be affected (there will be a movement along the SRAS, not a shift.
3. In the 1930s during the Great Depression, the money multiplier and the rate of inflation both increased dramatically
Explanation / Answer
(1) False
Crowding out occurs when domestic government budget deficit rises (due to higher government spending and/or lower tax revenue), and government finances the deficit by borrowing. This raises market interest rate which lowers investment demand.
(2) False
Lower wage rate will lower input cost, which will make firms increase production. Short run aggregate supply will shift to right. LRAS will not be affected.
(3) False
During Great Depression, aggregate demand was very low which caused deflation.