Question

Which of these statements is true?
	Cost-push inflation causes a decline in output, an increase in price level, and an increase in unemployment. During cost-push inflation, output increases and the price level decreases making it hard for producers to make money. Cost-push inflation is easier to correct than demand-pull inflation. Policymakers only have to increase aggregate demand to reduce inflation.

All of these explain a change in long-run aggregate supply EXCEPT:
	increases in productivity. changes in government spending. increases in business taxes. changes in resource prices.

In late 2015, Congressional House Speaker Paul Ryan helped pass a major budget bill signed by President Obama that eliminated many of the “sequester” provisions, or automatic spending cuts, that were implemented in 2013 after a significant political gridlock. Many economists applauded the elimination of the spending cuts because they felt the cuts increased the risk of another recession. Using the AD/AS model and what you know about the spending multiplier, explain why economists would come to this conclusion.

Government spending represents a large portion of spending in the economy. A decrease in spending shifts the aggregate demand curve to the left and causes a large change in the multiplier. Government spending represents a large portion of spending in the economy. A decrease in spending shifts the aggregate demand curve to the right and causes a large change in the multiplier. Government spending represents a small portion of spending in the economy. A decrease in spending shifts the aggregate demand curve to the right and causes a small change in the multiplier. Government spending represents a small portion of spending in the economy. A decrease in spending shifts the aggregate demand curve to the left and causes a small change in the multiplier.

When the economy is hit with a supply shock, such as higher prices for energy, food, or raw materials, is this doubly disruptive and harmful to the economy?

It is not doubly disruptive; it only causes unemployment. It is not doubly disruptive; it only causes inflation. It is doubly disruptive; it results in a leftward shift in the short-run aggregate supply (SRAS) curve leading to increased unemployment and a higher price level. It is doubly disruptive; it results in a rightward shift in the short-run aggregate supply (SRAS) curve leading to increased unemployment and a higher price level.

Answer 1

1 - Option B

Cost push inflation is easier to control than the demand pull inflation.

This is because the demand pull inflation is caused by the market forces of demand and supply and market mechanism is run automatically and is difficult to control.

2 - Option C

Increase in business taxes

All the other options show their effect in the long run supply except the taxes which depend upon the income.

3 - Option A

Government spending represents a large portion of spending in the economy . A decrease in the government spending shifts the aggregate demand curve to the left and causes a large change in the multiplier.

A change in multiplier is caused due to the change in consumption habits as a result of the change in the AD resulting from change in the govt. Spending.

4- Option C

It is doubly disruptive. It results in leftward shift in the short run aggregate supply curve leading to increased unemployment and a higher price level.

This is called the negative supply shock and does not bring increase in the level of output.