Question

If authorities believe that the natural rate of unemployment is lower than it actually is and pursue fiscal policies to move economic output to what they believe full employment to be, then which of the following is most likely to occur in the long run?

a. An increase in the unemployment rate.

b. A recession.

c. A depression.

d. An increase in the inflation rate

Suppose an economy is producing at its potential output. The rate of unemployment corresponding to this output level is 4 percent. However, the government mistakenly believes the natural rate of unemployment to be 2 percent and increases its spending and lowers taxes. This will:

a. shift the aggregate demand curve leftward.

b. create a recessionary gap.

c. shift the long-run aggregate supply curve rightward.

d. create an expansionary gap.

Temporary changes in tax rates as a tool of macroeconomic stabilization are likely to be less effective in an economy as:

a. consumers base their spending decisions on relative income.

b. consumers base their spending decisions on current income.

c. consumers base their spending decisions on permanent income.

d. consumers base their spending decisions on absolute income.

The $117 billion tax-rebate program of the U.S. government in early 2008 showed that:

a. there was a considerable increase in consumption and aggregate demand in the U.S. economy.

b. households spent most of their rebate check.

c. households saved most of their increase in income.

d. there was a considerable increase in production and aggregate supply in the U.S. economy

Please my time is running!! I need the answers.

Answer 1

1. An increase in the inflation rate

An increase in the inflation rate will occur due to the fiscal policies to boost the economy

2. d. create an expansionary gap.

this will create an expansionary gap as the economy will operate beyond potential output

3. consumers base their spending decisions on relative income.

Consumers base their expenditure on relative income, this is basically a measure on how individuals counter the effect of inflation

4.there was a considerable increase in production and aggregate supply in the U.S. economy

This lead to an increase in production as cost of production decreases, this incentivises sporducers to produce more goods for higer total profits.

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