Give an example of how an expansionary policy can fail given certain economic conditions.
What will be an ideal response?
Examples will vary but should show a thorough understanding of how certain economic conditions can cause an expansionary policy to fail. For example, suppose that Country A has been having a recession for the past 5 years. In an attempt to stimulate the economy, the government begins an expansionary policy by increasing the money supply. However, what the government does not realize is that the nation is at full employment. Companies are producing at their capacity. Therefore, by increasing the money supply, the government is pushing the economy beyond full capacity. This is a situation that cannot be sustained for a long period. To meet the unrealistic demand, input prices, such as wages and raw materials, increase. As a result, the supply decreases back to its original output. The only thing that has changed is the price level, which has risen.
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Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion. To move the economy back to potential GDP, Congress should
A) lower government purchases by $500 billion. B) raise government purchases by $500 billion. C) raise government purchases by more than $500 billion. D) lower taxes by an amount less than $500 billion. E) lower taxes by $500 billion.
Equations for C, I, G, and NX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume?
C = 1,500 + (MPC)Y I = 1,000 G = 2,000 NX = -200 A) 0.67 B) 0.75 C) 0.8 D) 0.9
Assume that the reserve—deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the money supply by $2,600,000. What is the currency—deposit ratio?
A) 0.2 B) 0.3 C) 0.4 D) 0.5
A typical economic good has which one of the following characteristics?
A) The desired quantity exceeds the quantity available at a zero price. B) The quantity available exceeds the desired quantity at a zero price. C) It uses no resources to produce. D) It is never scarce.