5. Referring to the figure US Macroeconomic Equilibrium : Which of the following

Question

5. Referring to the figure US Macroeconomic Equilibrium: Which of the following order of equilibrium points best represent how a contractionary fiscal policy is used in order to resolve an undesired supply shock:

A. B A D

B. D A D

C. B C B

D. C D A

E. D C D

F. All of the above are possible

G. Some of the above are possible

H. None of the above is possible

6. Referring to the figure US Macroeconomic Equilibrium: Which of the following order of equilibrium points best represent how a contractionary fiscal policy is used in order to resolve a recessionary gap that was created by the Fed:

A. B A D

B. D A D

C. B C B

D. C D A

E. D C D

F. All of the above are possible

G. Some of the above are possible

H. None of the above is possible

Explanation / Answer

"A. B A D", represent best how a contractionary fiscal policy is used in order to resolve an undesired supply shock,

Let's say because of the supply shock the initial equilibrium is at "B", now "B" price is too high because of the "supply shock", so now the govt can use "contractionary fiscal" policy in order to reduce the "P", so "AD" will reduce to "AD1" from "AD2", so new equilibrium will be "A", then as the expectation will adjust the "SRAS" will fall down ward, so the new equilibrium will be "D".

So, "B - A - D", be the correct option.

6).

here the correct option is "H".

Since, output is < the natural level, so here if we apply contractionary fiscal policy, => output will fall further.

So, all the given possibilities are not correct, "H".

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