Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the
economy will induce the president and Congress to conduct contractionary fiscal policy. Briefly explain the condition of the economy and what the president and Congress are attempting to do.
What will be an ideal response?
The president and Congress conduct contractionary fiscal policy to reduce inflation. In the graph below, the economy would move from point A in Year 1 to point B in Year 2 without any contractionary fiscal policy. At point B, inflation is higher than it would be if real GDP equaled potential real GDP. The president and Congress would decrease government purchases or increase taxes to slow down aggregate demand, trying to keep the economy at potential real GDP.
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The breakfast cereal industry has a four-firm concentration ratio of 80 percent. Is this enough information to classify the industry as an oligopoly? Is a high concentration ratio evidence that an industry is not competitive?
What will be an ideal response?
When a positive externality exists in a market, total surplus:
A. is the same as a market without a negative externality. B. is decreased by deadweight loss compared to that same market without a negative externality. C. is the same but re-distributed differently than if that same market did not have a negative externality. D. is increased by deadweight gain compared to that same market without a negative externality.
A decrease in stock prices will _____ the net wealth of households and _____ consumption.
Fill in the blank(s) with the appropriate word(s).
In the Keynesian-cross model, if the MPC equals 0.75, then a $1 billion decrease in taxes increases planned expenditures by ______ and increases the equilibrium level of income by ______.
Fill in the blank(s) with the appropriate word(s).