(5) According to classical economists, if the economy is in a recession, what mu
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Question
(5) According to classical economists, if the economy is in a recession, what must the government do to increase output to the full-employment level? Nothing Reduce interest rates Increase government spending Provide a credit for household savings
(6) Imagine that the economy is in a recession. Which one of the following tactics is a way to increase output by shifting aggregate demand outward? Raising taxes to increase the government surplus Increasing government spending Increasing the required reserve ratio Imposing tariffs on foreign goods
(7) In the short run, supply shocks cause prices to __________ and the quantity demanded to __________. increase; increase increase; decrease decrease; increase decrease; decrease
(8) Good deflation is characterized by an increase in supply at every price. a decrease in supply at every price. an increase in demand at every price. a decrease in demand at every price.
(9) The goal of Keynesian fiscal policy during a recession is to do nothing – let the economy recover on its own. move the economic equilibrium back to the full-employment level by increasing aggregate demand. move the economic equilibrium back to the full-employment level by decreasing aggregate supply. reduce long-run aggregate supply so that the economy can reach full employment without a long period of adjustment.
(10) Assume that the government increases its spending by $100 million to stimulate demand. In the long run, the effect of this spending is to increase output by more than $100 million. increase output by $100 million. raise prices. increase unemployment.
(11) The amount by which annual government spending exceeds annual government tax revenue is called the deficit. the debt. the dividend. M1.
(12) Suppose a law was passed to authorize more spending on roads, but several months later the first dollar had not been spent. This delay is an example of a(n) recognition lag. political lag. administration lag. operational lag.
(13) Which of the following is an example of an unintended effect of fiscal policy? The crowding-out effect Increased aggregate demand Unemployment insurance Reductions in international trade
(14) The goal of Keynesian fiscal policy during a recession is to do nothing—let the economy recover on its own. move the economic equilibrium back to the full-employment level by increasing aggregate demand. move the economic equilibrium back to the full-employment level by decreasing aggregate supply. reduce long-run aggregate supply so that the economy can reach full employment without a long period of adjustment.
(15) Imagine that our representatives in Congress have concluded that the economy needs the stimulus of additional government spending, but they have spent several months haggling over what type of spending will be authorized. This is an example of a(n) recognition lag. political lag. administration lag. operational lag.
Explanation / Answer
5. According to classical economists, if the economy is in a recession, what must the government do to increase output to the full-employment level?
Answer : Do Nothing. If you remember, classical economists there is very less or negligible role for the government to play. They believed in laisez-faire policy. They focused on the market to act freely. According to the classical economists, Say's Law say that Supply creates its own demand. Savings should equal investments. Wages, Prices and Interest rates are flexible enough. Market shall clear, in every situation. Price responds according to the market mechanism of supply and demand. Market is assumed to be self regulating, thus there is no need of government intervention. So. if it is a case of classical economists, in order to increase the output to the full employment level, there is no need for government intervention, thus it need to do nothing.
6.Imagine that the economy is in a recession. Which one of the following tactics is a way to increase output by shifting aggregate demand outward?
Ans. (b). Reducing taxes, normally puts extra money in the hands of the consumers, thereby increasing the total spend by the consumers. Thus increasing the taxes can't be the way to shift AD outwards.
Increasing government spending would increase the demand for output in the economy and thus more production. Thus increasing government spending can be a handy tool for shifting the aggregate demand outwards.
7. In the short run, supply shocks cause prices to __________ and the quantity demanded to __________.
In short run, supply shock means there is a short term shift in the Aggregate Supply curve either to right(favourable supply shock) or to the left(unfavorable supply shock). here let me assume it is unfavorable supply shock. So unfavorable supply shock actually shift SRAS curve to the left, that means higher prices and lower real GDP. Since prices are higher so lower demand or quantity demanded
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