Question

Suppose the economy's real interest rate is reduced. What initial effect would this have? Suppose there...

Suppose the economy's real interest rate is reduced. What initial effect would this have?

Suppose there is a major increase in federal spending for health care (with no increase in taxes). What initial effect would this have?

Suppose personal income taxes are reduced by 10% (with no change in government spending). What initial effect would this have?

Suppose labor productivity increases (with no change in nominal wages). What initial effect would this have?

Suppose nominal wages increase by 12% (with no change in productivity). What initial effect would this have?

a.Aggregate demand will increase; price and output levels will increase.

b.Aggregate demand will decrease; price and output levels will decrease.

c. Aggregate supply will increase; price will decrease; output levels will increase.

d. Aggregate supply will decrease; price will increase; output levels will decrease.

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Answer #1

Suppose the economy's real interest rate is reduced. What initial effect would this have?
a.Aggregate demand will increase; price and output levels will increase.
Explanation: Investment will increase, leading to increase in Aggregate Demand.

Suppose there is a major increase in federal spending for health care (with no increase in taxes). What initial effect would this have?
Ans. a.Aggregate demand will increase; price and output levels will increase.
Explanation: Government expenditure will increase, leading to increase in Aggregate Demand.

Suppose personal income taxes are reduced by 10% (with no change in government spending). What initial effect would this have?
Ans. a.Aggregate demand will increase; price and output levels will increase.
Explanation: Disposable income will increase, leading to increase in consumption and thus Aggregate Demand.

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