Question

Question:
Explain whether the following statements are TRUE or FALSE. You should explain your answer in each case and show on a graph.
a)   (……………..) If wages adjust fully to price increases in the long run, fiscal policy will have no effect on output.
b)   (...................) A decrease in government spending and an increase in costs lead to a decrease in the price level certainly.
c)   (……………..) An earthquake destroyed a small economy. As a result, the government decided to use an expansionary fiscal policy to counter the effects of the earthquake on the economy. The use of the expansionary fiscal policy would have caused both the price level and output level to be lower than what they would have been without the policy action.
d)   (...................) When the central bank buys bonds in the open market during a recession, interest rate increases.
e)   (……………..) Increase in costs lead to rising inflation and falling output at the same time.

Answer 1

a)True....... because,in the longer run, fiscal policy will only affetcs the price levels but there will be no effect on output.

b)True.... because,when costs are raising,and if government reduces spendings,it will lead to reduced price uncertainty.

c)False..... both the price level and output would be higher than what it was before policy action.

d) False....... because, when central bank buys bonds, it actually increases money supply in the economy therby reducing interest rates.

e)True......it happens during stagflation situation.