Question

1) For a fixed aggregate demand curve, an increase in long run aggregate supply will decrease prices.

True

False

2)

An attempt to reduce current budget deficits could shift the aggregate demand curve left and cause a recession.

True

False 3) Contractionary fiscal policy is politically popular. False True 4) If aggregate demand increases for a given AS curve, prices will decrease False True 5) Republicans love using fiscal policy to stabilize the economy. False True

Answer 1

1) True

In the graph below, we see that when the Aggregate Demand (AD) remains constant, and the Aggregate Supply (AS) increases in the long run, the equilibrium price is decreasing. When the Aggregate Supply (AS) increases, the aggregate supply curve shifts towards the right from AS to AS^'. Previously, the equilibrium price was P and the equilibrium quantity was Q. Now, after the aggregate supply has increased, the equilibrium price has fallen to P₁ in the figure and the equilibrium quantity has increased to Q₁.

2) True

When the government attempts to reduce the current budget deficit, it does it by increasing its tax rate and cutting government spending. Now, with these measures the money circulation velocity in the economy would decrease than before and this would reduce aggregate demand, so the aggregate demand curve would shift to the left and cause a recession.

3) False

When there is excessive inflation in the economy, the government uses contractionary fiscal policy by increasing taxes and cutting governement spending. However, contractionary fiscal policy is not politically popular because contractionary fiscal policies can lead to an economic recession and the government would not want that it happen. Instead the government focuses on expansionary fiscal policy so that there is economic growth in the country.

4) False

For a given AS curve, if the Aggregate Demand increases, the prices will increase and hence the statement is not true.

We see from the Diagram below, that when the Aggregate Demand (AD) increases and the Aggregate Demand (AD) curve shifts to the right, the equilibrium price increases from P to P^' and the equilibrium quantity also increases from Q to Q^'.

5) True

Fiscal Policy is an important tool by which republicans can stabilize the economy, hence the statement is true.