During the 3rd quarter of 1990, the economy looked most like: Year Real GDP Unem

Question

During the 3rd quarter of 1990, the economy looked most like:

Year Real GDP Unemployment CPI Potential GDP NAIRU 1990 Q3 $8,983.9 5.7% 136.5 $8970 5.9% 1. During the 3rd quarter of 1990, the economy looked most like C. AD 2. During the 3rd quarter of 1990, it appears that the economy was experiencing a. a recessionary gap b. an inflationary gap c. full employment 3. During the 3rd quarter of 1990, classical economists would advocate that the government: a. do nothing and wait for wage rates to start falling b. do nothing and wait for wage rates to start rising c. increase government spending and/or cut taxes d. reduce government spending and/or raise taxes 4. During the 3rd quarter of 1990, Keynesian economists would advocate that the government: a. do nothing and wait for wage rates to start falling b. do nothing and wait for wage rates to start rising c. increase government spending and/or cut taxes d. reduce government spending and/or raise taxes

Explanation / Answer

1.

Figure (c)

(This is because real GDP is more than potential GDP)

2.

Inflationary gap

(This is because real GDP is more than potential GDP)

3.

Do nothing and wait for wage rates to start falling

(Since classical economists did not believe in government intervention and would need to fall to bring GDP back to potential GDP level)

4.

Reduce government spending and/or raise taxes

(as it would cut down inflationary gap by adopting contractionary fiscal policies)

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