Question

Please answer the blanks. The answer choices are bolded and in parenthesis.

Suppose an economy at long run equilibrium experiences an increase in aggregate demand. Real GDP will be (GREATER OR LESS)   than potential GDP, resulting in an expansionary gap. To close the expansionary gap, the aggregate demand would need to be shifted to the (RIGHT OR LEFT)   , representing (A DECREASAE OR AN INCREASE)   in aggregate demand. This could be accomplished by (INCREASING OR DECREASING)   government spending or (INCREASING OR DECREASING)   taxes. This change in government spending and taxes will contribute to a budget (SURPLUS OR DEFICIT) .

If the economy expands, a (SURPLUS OR DEFICIT) will automatically be incurred. To balance the budget, government must either increase its (TAXES OR SPENDING)   or cut (TAXES OR SPENDING) , both of which would only (INCREASE OR DECREASE) aggregate demand even further—worsening the inflation. Notice that actions required to balance the budget annually would destabilize the economy. This is why most economists oppose requiring a balanced budget annually. Instead, they argue that the budget should just be balanced over time—over the course of the business cycle.

Answer 1

Suppose an economy at long run equilibrium experiences an increase in aggregate demand.

Real GDP will be GREATER than potential GDP, resulting in an expansionary gap.

To close the expansionary gap, the aggregate demand would need to be shifted to the LEFT, representing A DECREASE in aggregate demand.

This could be accomplished by DECREASING government spending or INCREASING taxes.

This change in government spending and taxes will contribute to a budget DEFICIT.

If the economy expands, a SURPLUS will automatically be incurred.

To balance the budget, government must either increase its SPENDING or cut TAXES , both of which would only INCREASE aggregate demand even further—worsening the inflation.