Question

Question 1

The Paradox of Thrift implies that

	a.	the average savings rate of 6% of Americans is too low
	b.	the average savings rate of 6% of Americans is too high
	c.	while high rate of savings by some citizens is good, higher rate of savings by Americans may reduce aggregate demand
	d.	Americans should not save at a higher rate than citizens of countries with whom we have high volumes of trade

Question 2

Macroeconomic policy activism:

	a.	involves the use of political activism made popular by liberal economists
	b.	mandates a balanced government budget.
	c.	involves the use of monetary and fiscal policy to smooth out the business cycle.
	d.	was the tool used by classical economists.

Question 3

According to the Classical Model:

	a.	the aggregate supply curve is horizontal.
	b.	increases in the money supply lead to proportional increases in the price level but no change in real output
	c.	increases in the money supply lead to proportional changes in output, but no change in the price level.
	d.	we are all dead in the long run

Answer 1

Q1:

Ans:- (C) while high rate of savings by some citizens is good, higher rate of savings by Americans may reduce aggregate demand.

Explanation:- The paradox of thrift  is a paradox of economics. The paradox states that an increase in autonomous saving leads to a reduced in aggregate demand and thus a reduce in gross output which will in turn lower saving. so here The paradox of thrift implies that American may reduce aggregate demand by high saving.

Q2:-

(C) involves the use of monetary and fiscal policy to smooth out the business cycle.

Explanation:-"Macroeconomic policy activism is the use of monetary and fiscal policy to smooth out the business cycle."

Q3:-

Ans:- (C) increases in the money supply lead to proportional increases in the price level but no change in real output

Explanation:- The Classical Model indicate that the economy is always at the full employment level of output, which represents its potential, so the aggregate supply curve is vertical. if any changes in aggregate demand only lead to a higher or lower price, but economic output remains the same.