21. In the ae-output model, an increase in government spending causes an: a. upw
ID: 1176769 • Letter: 2
Question
21. In the ae-output model, an increase in government spending causes an:
a. upward shift in the ae curve
b. downward shift in the ae curve
c. shift in the 45-degree line
d, rightward movement along the ae curve
e. leftward movement aking the ae curve
22. Superhighways, public housing facilitates, and defense projects are all ways that a president can
a. combat inflaction
b. raise unemployment
c. close a recessionary gap
d. reverse the pardox gap
23. using the ae output model, assume the ae line is above the 45 degree line at full employment GDP. This vertical distance is called a:
a. negative GDP gap
b. inflationary gao
c. recessionary gap
d. marginal propensity to consume gap
24. In the situation selected in # 23, a tax increase causes an:
a. upward shift in the ae curve
b. downward shift in the ae curve
c. shift in the 45 degree line
d. rightward movement along the ae curve
e. leftward movement along the ae curve
25. Assume an economy is in recession with an MPC of 0.75 and a GDP gap of 100 billion. How much government spending increase to eliminate the gap? Be sure to show your math. What would be the effect of the government cutting taxes by the amount you calculated? Would the tax cut restore full employment GDP? Explain your answer
Explanation / Answer
21. In the ae-output model, an increase in government spending causes an:
a. upward shift in the ae curve
22. Superhighways, public housing facilitates, and defense projects are all ways that a president can
c. close a recessionary gap
23. using the ae output model, assume the ae line is above the 45 degree line at full employment GDP. This vertical distance is called a:
d. marginal propensity to consume gap
24. In the situation selected in # 23, a tax increase causes an:
b. downward shift in the ae curve
25. Assume an economy is in recession with an MPC of 0.75 and a GDP gap of 100 billion. How much government spending increase to eliminate the gap? Be sure to show your math. What would be the effect of the government cutting taxes by the amount you calculated? Would the tax cut restore full employment GDP? Explain your answer
Ans : Slope of Ae-Curve = 0.75 ;
Delta X = $100 billion
delta Y/ delta X = slope = 0.75
Delta Y = 0.75*100 = $75 billion
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