On the following graph, AD, represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate supply curve. The economy's natural real GDP is $12 billion. PRICE LEVEL NRGDP 106 SRAS 104 20 102 100 98 96 10 12 AD₁ REAL GDP (Billions of dollars) AD2 AD3 14 16 ? $10 billion, $6 billion, or $12 The initial short-run equilibrium level of real GDP is 100, 102, OR billion and the initial short-run equilibrium price level is 104. Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the output gap. According to critics of Keynesian fiscal policy, which curve in the previous graph will most likely be the new aggregate demand curve? O AD₂ O AD₁ O AD $10 billion, $6 billion, or $12 billion 100, 102, OR As a result, the equilibrium level of real GDP will be and the equilibrium price level will be 104. According to critics of Keynesian fiscal policy, which of the following is true in this case? The increase in deficit-financed government spending causes real GDP to increase to natural real GDP. O The increase in deficit-financed government spending has no impact on real GDP and the price level. O The increase in deficit-financed government spending causes real GDP to increase, but not to natural real GDP. O Real GDP does not increase; only the price level increases. zero crowding out, complete crowding out, or This is an example of incomplete crowding out
On the following graph, AD, represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate supply curve. The economy's natural real GDP is $12 billion. PRICE LEVEL NRGDP 106 SRAS 104 20 102 100 98 96 10 12 AD₁ REAL GDP (Billions of dollars) AD2 AD3 14 16 ? $10 billion, $6 billion, or $12 The initial short-run equilibrium level of real GDP is 100, 102, OR billion and the initial short-run equilibrium price level is 104. Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the output gap. According to critics of Keynesian fiscal policy, which curve in the previous graph will most likely be the new aggregate demand curve? O AD₂ O AD₁ O AD $10 billion, $6 billion, or $12 billion 100, 102, OR As a result, the equilibrium level of real GDP will be and the equilibrium price level will be 104. According to critics of Keynesian fiscal policy, which of the following is true in this case? The increase in deficit-financed government spending causes real GDP to increase to natural real GDP. O The increase in deficit-financed government spending has no impact on real GDP and the price level. O The increase in deficit-financed government spending causes real GDP to increase, but not to natural real GDP. O Real GDP does not increase; only the price level increases. zero crowding out, complete crowding out, or This is an example of incomplete crowding out
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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TOPIC: Crowding Out.
Transcribed Image Text:On the following graph, AD, represents the initial aggregate demand curve in a hypothetical economy, and SRAS represents the initial aggregate
supply curve. The economy's natural real GDP is $12 billion.
PRICE LEVEL
NRGDP
106
SRAS
104
20
102
100
98
96
10
12
AD₁
REAL GDP (Billions of dollars)
AD2
AD3
14
16
?
$10 billion,
$6 billion,
or $12
The initial short-run equilibrium level of real GDP is
100,
102, OR
billion and the initial short-run equilibrium price level is 104.
Suppose the government, seeking full employment, borrows money and increases its expenditures by the amount it believes necessary to close the
output gap. According to critics of Keynesian fiscal policy, which curve in the previous graph will most likely be the new aggregate demand curve?
O AD₂
O AD₁
O AD
$10 billion,
$6 billion,
or $12
billion
100,
102, OR
As a result, the equilibrium level of real GDP will be
and the equilibrium price level will be
104.
According to critics of Keynesian fiscal policy, which of the following is true in this case?
The increase in deficit-financed government spending causes real GDP to increase to natural real GDP.
O The increase in deficit-financed government spending has no impact on real GDP and the price level.
O The increase in deficit-financed government spending causes real GDP to increase, but not to natural real GDP.
O Real GDP does not increase; only the price level increases.
zero crowding out, complete crowding out, or
This is an example of
incomplete crowding out
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