Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD 2. In the end, the aggregate demand curve is still AD 1. A possible reason for this is that
A. the economy is already at full employment.
B. the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving.
C. some of the increased government spending is not counted in GDP.
D. people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
Answer: D. people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
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In the figure above, if the marginal propensity to import increased, the aggregate expenditure lines would ________ and the multiplier would ________ in value
A) become less steep; fall B) become less steep; rise C) become steeper; rise D) not change; fall E) not change; rise
Under laissez-faire, the force that drives the economy toward an efficient outcome is
A. central planning. B. majority voting. C. the pursuit of self-interest. D. altruism.
A publicly traded firm has 4 million shares of stock outstanding, with a current share price of $50. The value of its plant and equipment is $250 million. Its profit annually is $50 million. This firm should
a) divest itself of some of its capital b) issue more stock c) continue to operate as it is d) invest in new plant and equipment e) issue bonds
Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by
A) $12,000 billion. B) $600 billion. C) $533.3 billion. D) $266.6 billion.