A)The policymakers of Hohoho Mountain have identified that their economy is suff

Question

A)The policymakers of Hohoho Mountain have identified that their economy is suffering from an inflationary gap. If they use fiscal policy to fix the problem

Question 2 options:

1)

2)

3)

4)

they can decrease taxes. This will cause disposable income to fall, C to fall, and AD to shift to the left.

B)If a drought reduces agricultural output and at the same time government spending increases, what will happen to equilibrium RGDP and equilibrium price level in the US?

Question 8 options:

1)

2)

3)

4)

1)

they can increase taxes.   This will cause disposable income to rise, C to rise, and AD to shift to the right.

2)

they can increase G. This will cause AD to shift to the right.

3)

they can decrease G. This will cause AD to shift to the left.

4)

they can decrease taxes. This will cause disposable income to fall, C to fall, and AD to shift to the left.

B)If a drought reduces agricultural output and at the same time government spending increases, what will happen to equilibrium RGDP and equilibrium price level in the US?

Question 8 options:

1)

Price level in the economy will fall and the effect on equilibrium RGDP is ambiguous.

2)

Price level in the economy will rise and the effect on equilibrium RGDP is ambiguous.

3)

Equilibrium RGDP will rise and the effect on equilibrium price level is ambiguous.

4)

Equilibrium RGDP will fall and the effect on equilibrium price level is ambiguous.

Explanation / Answer

A). Inflationary gap is situation in which the real GDP is greater than the potential GDP. So inorder to fix this a government may increase the taxes or reduce the government spending, when this action occurs the disposable income of the people will fall and the aggregate demand decreases so the AD curve will shift to the left. (unfortunately there is no right option in the question).

Decreasing the tax or government expenditure would only result in the increase of the disposable income and this would negatively affect the situation.

B). Price level in the economy will rise and the effect on equilibrium RGDP is ambiguous.

When there is an increase in the government spending, this adds more money to the people and this will increase the disposable income in the economy. The result is the increase in the aggregate demand, when the aggregate demand rises the AD curve shits to the right and it is a rise in the price level.

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