Question

Suppose that the economy is at full employment (our economy has reached its potential GDP or the maximum that we can normally produce). Now suppose that a world recession occurs (it decreases our exports). Which problem would we choose to combat?

		The decreased GDP
		The inflation
		We could choose to combat the decreased GDP or the inflation
		None of the answers is correct

In 2013 the U.S. government removed its tariff on imported ethanol. Removing the tariff benefited ________ of ethanol, and hurt ________?

	A.	U.S. producers; the U.S. government.
	B.	U.S. consumers; no one.
	C.	U.S. consumers; the U.S. government.
	D.	U.S. producers; foreign consumers.

Answer 1

1) If aggregate demand fall from the potential level of output, it will reduce the price as well as level of real GDP in the economy.

We will choose to combat the level of fall in real GDP. To do that, we have to adopt fiscal or monetary policy to raise demand which will automatically raise price level.

Option A is correct.

2) Due to tariff imposed by government to raise prices of imported ethanol, removal of tariff will lower the price for consumers of imported ethanol thus it will benefit consumers for sure. Removal of tariff will reduce the government revenue generated by it, thus it will hurt them.

Option C is correct.