Question

1.Which of the following does not affect the location of the DD curve? (a) monetary policy...

1.Which of the following does not affect the location of the DD curve?

(a) monetary policy

(b) government spending

(c) taxes

(d) export Demand

(e) price levels

2.A permanent fiscal expansion under a flexible exchange rate regime

(a) shifts the DD to the right and the AA schedule to the left, leaving output the same.

(b) shifts the DD and the AA schedules to the right, increasing output.

(c) shifts the DD and the AA schedules to the right, decreasing output.

(d) shifts the DD to the right and the AA schedule to the left, increasing output.

(e) shifts the DD to the left and the AA schedule to the left, decreasing output.

MULTIPLE CHOICE, Please choose correct answer

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Homework Answers

Answer #1

1. Price levels. Any change in price of the product leads to a movement in demand curve rather than a shift. Factors affecting demand other than price leads to a parallel shift in demand curve.

2. Shifts the DD curve to the right and AA schedule to the left, leaving the output same. When there is fiscal expansion, government expenditure increases/ tax decreases, which leads to increase in income. This further raises the money demand which inturn raises interest rate to bring back the money market in equilibrium. Increase in interest rate decreases the investment which further decreases the income. Hence, income comes back to its original position and remains constant.

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