Question

Some questions may/may not have more than one answers.

1) Keynesian contractionary fiscal policy would shift the AD curve to the right when

• there are direct cuts in govt spending
• taxes are cut (incorrect)
• supply shocks hit consumers
• there is unexpected inflation
• None of these

2) The coordination argument states

• A drop in supply of goods cause sticky prices
• Sticky prices occur because not all information is known
• None of these
• Hypothetically, most people are okay with lower wages in “bad times”
• Perfect information is needed about the economy (1/3 credit)

3) If there is inflationary pressure, Keynesian policies recommend the following:

• Raise taxes
• Decrease govt spending
• Implement contractionary fiscal policy
• None of these (incorrect)
• Expand money supply

Answer 1

1. Ans is D. When there is contractionary fiscal policy then AD can only shift rightward when there is more expansionary monetary policy which means LM curve has to shift more towards right which is possible only when there is unexpected inflation

2. Ans is A. A decrease in supply of goods would cause price to decrease and lead to further decrease in quantity supplied leading to recession in an economy

3. In case of inflationary pressure, govt should implement contractionary fiscal policy which is possible by decreasing G, increasing tax.

thus first all three options are correct