Question

​Which of the following is a component of aggregate demand?

a. ​Transfer payments from government

b. ​Borrowing by government

c. ​Purchases by government

d. ​Saving by consumers

e. ​Taxation by government

​Which of the following is an automatic stabilizer?

a. ​Net taxes

b. ​Government spending

c. ​The interest rate

d. ​The minimum wage set by the government

e. ​Unemployment insurance

​The effect of automatic stabilizers on the business cycle is to:

a. ​make upswings smaller and downswings larger.

b. ​make both upswings and downswings larger.

c. ​make both upswings and downswings smaller.

d. ​eliminate fiscal drag.

e. ​make upswings larger and downswings smaller.

​The steeper the short-run aggregate supply curve, _____.

a. ​the larger the value of the spending multiplier

b. ​the flatter the aggregate demand curve

c. ​the larger the impact of a shift in aggregate demand on equilibrium output

d. ​the smaller the change in government spending needed to achieve the desired change in equilibrium output

e. ​the smaller the impact of a shift in aggregate demand on equilibrium output

Answer 1

Question 1

Aggregate demand indicates the quantity of aggregate output demanded at various price level.

Aggregate demand is composed of following components -

1. Consumption expenditure

2. Government purchases

3. Gross investment

4. Net exports

So, purchases by government is a component of the aggregate demand.

Hence, the correct answer is the option (c).

Question 2

Trasfer payments are the automatic stabilizers.

Unemployment insurance is a transfer payment instrument.

So,

Unemployment insurance is an automatic stabilizer.

Hence, the correct answer is the option (e).

Question 3

Automatic stabilizers reduce the magnitude of economic fluctuations.

In other words, the effect of automatic stabilizers on the business cycle is to make both upswings and downswings smaller.

Hence, the correct answer is the option (c).

Question 4

When the short-run aggregate supply curve is steeper then, in that case, change in aggregate demand brings smaller change in real GDP.

In other words, the steeper the short-run aggregate supply curve, the smaller the impact of the shift in the aggregate demand on the equilibrium output.

Hence, the correct answer is the option (e).