Question

9. In the face of an inflationary gap, the appropriate fiscal policy is to:
  
Do nothing since the short run aggregate supply is vertical and any government action will be crowded out
Reduce government spending and raise the discount rate
Reduce government spending while also lowering taxes to offset the government spending multiplier
Reduce government spending
Increase government spending

10,A few years ago the Wall Street Journal reported that “U.S. productivity grew at the fastest clip in more than a year during the second quarter, signaling steady growth in the economy and a gauge of inflationary pressure dropped….” Increases in productivity may cause a drop in “inflationary pressure” because
  
Given any level of long run and short run aggregate supply, the long run aggregate demand is increasing
Increases in productivity increase a nation’s income which means that most individuals are less worried about inflation.
While the long run aggregate supply is always equal to the level of aggregate demand, the short run aggregate supply will be decreasing causing prices to fall
Given any level of aggregate demand, the long run and short run aggregate supply is increasing

Answer 1

9) Reduce government spending. This is likely to discourage spending and so aggregate demand is decreased. Output returns to its full employment level and gap is eliminated. There is no crowding out because there is no increase in interest rate

10) Given any level of aggregate demand, the long run and short run aggregate supply is increasing. This is because LRAS and SRAS both are the function of productivity. Higher producivity means shifting SRAS and LRAS to the right. This raises income and reduces price level.