Question

1. Suppose the following occurs: (1) There is a decrease in households’ wealth due to a decline in the stock market, (2) and at the same time, the government restricts the amount of cars that car companies can produce by placing an emission tax on each car produced. (3) the shift in the AD curve shifts more than the shift in the AS curve. Based on this information, in the short run equilibrium Price Level will __________ ; the equilibrium real GDP will _________;and the unemployment rate will __________.(Hint: Draw the initial AD and AS curves and then on the same graph draw the new AD and AS curves to derive your final answer).

a.	rise; fall; rise
b.	fall; rise; rise
c.	fall; rise; fall
d.	rise; rise fall
e.	fall; fall; rise

2. During the Great Recession, real gross domestic product (GDP) decreased and the unemployment rate increased to above-normal levels.Which of following best explains why this happened?

a. A significant decline in military spending following the end of a war led to a recession.

b. A sharp recession followed the United States abandoning the gold standard.

c. A decline in housing prices and stock prices, plus a financial crisis, caused a recession.

d. A sudden increase in oil prices caused inflation and a deep recession.

e. A stock market crash, large numbers of bank failures, an increase in tax rates, and a tight money supply caused a recession.

3. Senator Willie Mays, who retired as a player for the San Francisco Giants, proposes that income tax structure be revised to have two tax rates. The first tax rate, 25 percent, applies to persons whose income is between $0 and $50,000 a year. The second, 10 percent, applies to persons whose income is more than $50,000 a year. This is a

a. regressive income tax structure.

b. proportional income tax structure.

c. progressive income tax structure.

d. cyclical income tax structure

4.Classical economists believe that the economy is stable and tends toward full employment because

           a. the government plays an active role in managing the economy.

           b. savings is a drain on demand and must belimited.

           c. the short run is more important than the long run, and economic policy only works in the short run.

           d. prices are flexible and allow the economy to quickly return to full employment.

           e. prices are sticky and will not prevent the economy from adjusting to full employment.

Answer 1

1. As the household's weaht reduces due to decrease in stock prices, AD curve shifts leftwards. At the same time AS curve shifts leftwards due to emission tax. The shift in AD curve is more than AS, so the prices and output reduces, reduction in output is more than reduction in prices and unemployment will rise. This is depicted in the diagram below. So correct option is e: fall,fall,rise

2. Great dpression happened due to stock market crash, followed by bank failures an increase in tax rate and reduction in money supply. This led to reduced GDP and increased unemployment rate. Hence option e is correct.

3. A regressive tax is a tax in which average tax rate decreases as the amount subject to taxation increases. Here, as the income bracket increases, tax rate decreased. Hence option a is correct.

4. Classical economists believe that the economy is stable and tends toward full employment because prices are flexible and quickly allow the economy to return to full employment level. Hence option d is correct.