Part I: Multiple Choice Questions 1. Refer to Figure 1. If the aggregate demand
ID: 2440018 • Letter: P
Question
Part I: Multiple Choice Questions 1. Refer to Figure 1. If the aggregate demand curve is at AD, the government should: ( Figure 1 Price AS a. raise taxes to move to AD2. b. cut taxes to move to AD2 c. cut taxes to move to AD. d. cut spending to move to AD2. e. not change its behavior. ADs AD 2 AD i Y Real GDiP (Potential Output Figure 2 AS Assume the distance between AD, and ADais equal to the dstne between ADaand ADs. AD AD AD Real GDP (dollars) Refer to Figure 2. If the economy is in equilibrium at point C, then, other things equal, an increase in government spending will: a. decrease the price level. b. lower real GDP and leave the price level unchanged. c. lower real GDP and increase the price level. d. increase the price level and leave real GDP unchanged. e. have no effect on real GDP or the price level. 2.Explanation / Answer
1) ans is B
A cut in taxes meaning disposable income increases due to which consumption expenditure will increase and thus aggregate demand will increases. Thus aggregate demand will shift to the right leading to an increase in price and output.
2)ans is D
An increase in government spending will increase aggregate expenditure and will shift the aggregate demand to the right leading to an increase in price and real GDP unchanged.