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Review View Tell me what you want to do E 1Normal 1 No Spac... Heading 1 Heading 2 TitleSubtitle Subtle Em... Emphasis Intense E.. Styles policy Paragraph 7. The proper fiscal policy to use in times of in a recession or weakening econony is a) laissez faire policy b) mercantilist policy c) expansionary fiscal policy d) contractionary fiscal policy e) stationary policy 8. In the following examples, who would be best off with unexpected inflation? a) A union worker whose contract specifies wage increases for the next five years b) A retiree living off of fixed income from Social Security c) A couple paying off a variable-rate mortgage d) A govermament employee getting salary increases every other year e) A student paying of a fixed-interest stadent loan 9. Real income" refers to (a) the net income received after taxes are paid (b) the net incone received after both taxes and other deductions are paid (c) income before being adjusted for inflation (d) income relative to family size. (e) the purchasing power of income. 10. The measure of the real rate of interest can be expressed as: a Nominal rate of interest plus inflation real rate of interest b. % change in the real rate of interest % change in the nominal rate of interest-% change in the rate of nnaton c. The tate of interest -rate of income growth 11. Inflation is defined as a a rapid growth in the economy b. rise in the unemployment rate. c prevalence of overcharging of prices d. an overall movement upward in prices. 12. Nominal income is the a) average amount of a paycheck b) normative amount that a wocker should be paid c) dollar value of pay before adjustments for inflation d) purchasing power of income. e) maximum amount a worker can be paid 13. Some revenses and expendstures automatically change as the economy booens or slamps. Examples include A Income tax revenue B Uaemployment insurance tax revens C. Discretionary spendiag D. Both B and C E. Both A and B 14. When the govenment spends more than it collects in taxes, it will have a A. Balanced budget B. Budget deficit C. Budget surplus daring an economic expansson because 15. Income tax receipts tend to a) Remain unchanged, incomes fall during expansions b) Rise, incomes rise during expansions c) Fall, incomes fall during expansions d) Rive, incomes fall during expansions e) Fall; incoenes rise expansions

Explanation / Answer

7.

The equilibrium rate of real GDP is that at which the aggregate demand in the economy equals aggregate supply in the economy in short run. In the long run the economy produces natural real GDP by employing all the workers available at current market wage rate. This is called full-employment real GDP and the unemployment is called the natural rate of unemployment. The long run real GDP is constant and at this level the long run supply curve is a vertical straight line given the fact that whatever be the price the economy cannot produce beyond this level in the long run.

A recessionary gap is the condition in which the Real GDP that the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate. In recessionary gap the short run equilibrium real GDP is less than the natural real GDP.

To combat or off set the recessionary gap the economy needs to produce more than what it is producing in the short run. Thus it needs to increase its aggregate expenditure and real GDP. Thus the government took an expansionary fiscal policy of either cutting taxes or increasing government spending. The increased government spending increases the aggregate expenditure and thus shifts the aggregate demand curve upward until the economy reaches long run equilibrium.

Therefore, the correct option is

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8.

An average increase in overall price level is called inflation. The inflation has some cost attached to it, in terms of lower purchasing power of money. Sometimes people can foresee the future inflation and prepare for it. This is anticipated inflation. Sometimes people cannot anticipate inflation and get hurt from its cost. This is unanticipated inflation. Unanticipated inflation allows one group to achieve arbitrary profit and allow redistribution of income and wealth from one group to another.

The nominal interest is the reported interest rate that is not adjusted for inflation. The real interest rate is the nominal interest rate adjusted for the inflation, also called the inflation adjusted interest rate. If someone borrows at fixed interest rate, and the inflation rate increases then eventually borrower will gain from the deal. There will be a redistribution of income from borrower to the lender.

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9.

The real income is incoem adjusted for inflation. That is the amount the money can buy at particular point of time.

Therefore, the correct option is

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10.

The nominal interest is the reported interest rate that is not adjusted for inflation. The real interest rate is the nominal interest rate adjusted for the inflation, also called the inflation adjusted interest rate.

The correct option is

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