Question

1. If the economy overheats, the self-correcting mechanism will

   	A.	Shift AD to the left in the long run
   	B.	Shift AD to the right in the long run
   	C.	Shift SRAS to the left in the long run
   	D.	Shift SRAS to the right in the long run

2. Fiscal policy refers to the idea that aggregate demand is changed by changes in

   	A.	the money supply
   	B.	government spending and taxes
   	C.	trade policy
   	D.	all of the above are correct

3. When the economy grows at the rate of 3% a year, a 7% growth in money supply would result in a

   		10% inflation
   		10% deflation
   		4% inflation
   		4% deflation

Answer 1

Ques 1 Option C is correct

If the economy overheats, the self-correcting mechanism will Shift SRAS to the left in the long run

When the economy overheats there is an inflationary cap, the self-correction measure closes the gap with higher wages and a decrease in the short-run aggregate supply

Ques 2 Option B is correct i.e. government spending and taxes

The two most important tools used by the government to impact the economy are taxes and government spending

Ques 3 Option C is correct

Inflation rate = Growth rate of M2 + Growth rate of velocity - Growth rate of real GDP

-Inflation rate = 7+0-3 = 4%