Question

Graph #3

Economic Impact: The U.S. Government cuts defense spending.

Question 37 (1 point)

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What change will occur in the graph of the economy due to this impact?

Question 37 options:

	SRAS shifts Left
	AD shifts Right
	SRAS shifts Right
	AD shifts Left

Question 38 (1 point)

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What is the “state” of the economy caused by the cut in defense spending?

Question 38 options:

	Recessionary Gap
	Long-run Equilibrium
	Inflationary Gap
	None of the Above

Question 39 (1 point)

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What does the graph show happening to the short run price level immediately following the cut in defense spending, ceteris paribus?

Question 39 options:

	The price level rises
	The price level remains unchanged
	The price level falls
	There is not enough data to answer this question

Question 40 (1 point)

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Select the correct series of steps through which the economy will self-regulate after the cut in defense spending:

Question 40 options:

	Consumption rises, shifting AD to the right until the economy returns to long-run equilibrium
	Wage rates rise, shifting SRAS to the left until the economy returns to long-run equilibrium
	Consumption falls, shifting AD to the left until the economy returns to long-run equilibrium
	Wage rates fall, shifting SRAS to the right until the economy returns to long-run equilibrium

Question 41 (1 point)

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Monetary policy advocates would recommend which of the following actions to alleviate the economic state?

Question 41 options:

	Wait for the wage rate to fall, allowing the economy to grow on it’s own
	Practice contractionary monetary policy, slowing growth in the economy
	Wait for the wage rate to rise, allowing the economy to slow on it’s own
	Practice expansionary monetary policy, promoting economic growth

Answer 1

Answer : 37) The answer is option D : "AD shifts Left".

Government spending is a component of AD curve. If government spending decrease then the AD curve shift to leftward. Hence except option D other options are not correct. Therefore, option D is the correct answer.

38) The answer is option C : "Inflationary Gap".

If the economy face an inflationary gap situation then the government use contractionary fiscal policy to eliminate this gap. The tools of contractionary fiscal policy are decrease in government spending or increase in tax rate. Hence except option C other options are not correct. Therefore, option C is the correct answer.

39) The answer is option C : "The price level falls".

If government spending decrease then the AD curve shift to leftward. As a result, the price level fall. Hence except option C other options are not correct. Therefore, option C is the correct answer.

40) The answer is option C : "Consumption falls, shifting AD to the left until the economy returns to long-run equilibrium".

The cut in defence spending decrease the consumption of the economy. This decrease the aggregate demand and the AD curve shift to leftward until the economy reach at long run equilibrium. Hence except option C other options are not correct. Therefore, option C is the correct answer.

41) The answer is option B : "Practice contractionary monetary policy, slowing growth in the economy".

Based on given information the current economic state is inflationary gap situation. To eliminate this gap the monetary policy advocates will recommend to use the contractionary monetary policy. This will create slow growth in the economy and will eliminate the inflationary gap situation. Hence except option B other options are not correct. Therefore, option B is the correct answer.