Question

1. Of these statements about the potential GDP line, which is incorrect?

a) The potential GDP line is a vertical line.

b) The potential GDP line indicates the quantity of output the economy can produce

c) The potential GDP line makes the assumption that it is at less than full employment of its physical capital and labor.

2. If a Keynesian economist is advocating the current economic policy be to increase government spending, what is the state of the current economy?

a) The economy is experiencing a recessionary gap.

b) The economy is experiencing an inflationary gap.

c) The economy is experiencing natural unemployment at potential GDP.

3. For the GDP to change when the AS curve is horizontal, means it must change through:

a) increases or decreases in potential output.

b) cyclical unemployment

c) increases or decreases in aggregate demand.

4. It is important to remember when calculating the spending multiplier to determine government spending (in order to influencing the economy), the ________ in the income-expenditure model is found at the point where the level of GDP/national income equals aggregate expenditure.

a) macro equilibrium

b) formula

c) micro equilibrium

Answer 1

1.

The potential GDP is the level of GDP at full employment output. Hence it cannot be based on the assumption that output is below the full employment level of capital and labor.

the correct option is c

2.

If the Keynesian economic policy is to increase government spending then it means the economy is experiencing a recessionary gap and output lies below full employment level and requires an increase in government spending to increase aggregate demand.

the correct option is a

3.

For the GDP to change when AS curve is horizontal means price level is fixed hence to change output requires to change aggregate demand curve.

the correct option is c

4.

The micro equilibrium is found in the income-expenditure model at the point where GDP equals aggregate expenditure while calculating spending multiplier.

the correct option is c