Question

1a.

A "political business cycle" suggest that:

Multiple Choice

• cyclical swings in the economy are produced by the inherent instability found in capitalist economies.

• there is a trade-off among goals that tends to make the economic policies of state and local governments procyclical.

• the tools of fiscal policy may be used for political gains and reelection.

• the cyclically adjusted budget is a better indicator of the state of the economy than the actual budget.

1b.

What are the goals of fiscal policy?

Multiple Choice

• Increase deflation and increase nominal GDP.

• Increase profits and reduce expected returns.

• Control inflation and promote full employment.

• Increase nominal wages and reduce real interest rates.

1c.

From the information provided, determine whether you are given an Aggregate Supply or Aggregate Demand Schedule and, if Aggregate Supply, the time frame associated with the price level and output. HINT: You may want to plot out the points on a graph.

Price Level	Output (in billions)
104	$250
103	250
102	250
101	250
100	250

Multiple Choice

• Aggregate Demand

• Short Run Aggregate Supply

• Long Run Aggregate Supply

• Immediate Short Run Aggregate Supply

Answer 1

1a. the tools of fiscal policy may be used for political gains and reelection

reason: Political business cycle is a theory that suggests that the business cycle is the result of manipulation by the incumbent political party in order to increase its chances of re-election. There will be expansionary pre-election policies and contractionary post-election policies.

1b.Control inflation and promote full employment.

The main goal of fiscal policy iis to achieve and maintain full employment and to control inflation, thereby achieve economic growth.It is also used to increase aggregate demand and control other economic issues.

1c. Long Run Aggregate Supply

When the data are plotted on a graph, we get,

The supply curve is vertical. It is therefore a long run supply curve. Long run supply curve is vertical because it is assumed that it is not affected by price level. Changes in aggregate demand are assumed to be temporary. Ultimately what affects LRS curve are capital, labor and technology which are assumed to be used optimally, resulting in a vertical supply curve.