23. When potential GDP is actual real GDP, theFederal Reserve acts to decrease t

Question

23. When potential GDP is actual real GDP, theFederal Reserve acts to decrease the money supply in the economy, and aggregate ceteris paribus. demandwill a) less than; increase bj less than; decrease c) greater than; increase d) equal to; decrease e) greater than; decrease AS AS AS 0 AD 0 Q2Q1 Q3 Real Domestic Output 24. Refer to theabove diagram. Assume potential GDP -Q. Which of the following statement is false? a) At Qs, there is an inflationary gap, and real GDP > potential GDP b) At Q there is only structural and cyclical unemployment, no frictional c). The unemployment rate is lower at Qs than at Q2 d) At Q there is a recessionary gap that would require expansionary fiscal policy to correct. ej The shift from AS1 to AS 2 could h ave resulted from an increase in the costs of fadtors of production 5. Which combination of fiscal policy actions would be most effective for an economy with severe recession? a) b) c) d) Decrease taxes and government spending Increase taxes and decrease government spending Increase taxes andgovernment spending Decrease taxes and increase government spending 26. A decrease in the supply of lettuce decreases its equilibrium price and increases its equilibrium quantity rue b) False 27. The estimated value of productive services of a person who does his own chores at home is included in GDP rue b) False

Explanation / Answer

23. B. Less than, decrease

Explanation: When the potential GDP is less than the real GDP, the economy faces inflationary pressure. Therefore, the Federal Reserve decreases the money supply which results in a fall in the aggregate demand and brings the economy back to the equilibrium.

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