Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 25, Problem 2SCQ
In a Keynesian framework, using an AD/AS diagram, which of the following government policy choices offer a possible solution to recession? Which offer a possible solution to Inflation?
- A tax Increase on consumer income.
- A surge in military spending.
- A reduction in (axes for businesses that Increase investment.
- A major Increase in what the U.S. government spends on healthcare.
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Suppose you are Herb Stein, Chair of Economic Advisors to President Ford. OPEC has just quadrupled the price of oil. The entire economy uses oil in manufacturing (exaggeration, but not a big one), consequently the costs reflected by the AS curve dramatically increase. Using the AD/AS model, what happens to output and prices? Same role, a recession with inflation now exists(stagflation), both are serious, 10% u/e, 14% inflation. You are thinking of proposing a solution to the recession, the negative GDP gap is $300 billion, the MPC is .75. Businesses won't increase Investment because of fear of losses You remember from your econ 101 class, that there is a multiplier effect for Government Expenditures. If you just want to fix this negative gap, how much Government expenditure would you propose? Same role, Using the AD/AS model, what would you expect to be the result of your proposal in the above question, with regard to output, and inflation? Does the degree of the shape of the AD/AS…
Using the AD/AS model, what would be an explanation for observing an increased price level and a decreased real GDP?
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none of the above
tax rates fall
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Chapter 25 Solutions
Principles of Economics 2e
Ch. 25 - In the Keynesian framework, which of the following...Ch. 25 - In a Keynesian framework, using an AD/AS diagram,...Ch. 25 - Use the AD/AS model to explain bow an inflationary...Ch. 25 - Suppose the U.S. Congress cuts federal government...Ch. 25 - How would a decrease in energy prices affect the...Ch. 25 - Does Keynesian economics require government to set...Ch. 25 - List three practical problems with the Keynesian...Ch. 25 - Name some economic events not related to...Ch. 25 - Name some government policies that cod cause...Ch. 25 - From a Keynesian point of view, which is more...
Ch. 25 - Why do sticky wages and prices increase the impact...Ch. 25 - Explain what economists mean by menu costs.Ch. 25 - What tradeoff does a Phillips curve show?Ch. 25 - Would you expect to see long-run data trace out a...Ch. 25 - What is the Keynesian prescription for recession?...Ch. 25 - How did the Keynesian perspective address the...Ch. 25 - In its recent report, The Conference Boards Global...Ch. 25 - What may happen if growth in China continues or...Ch. 25 - Does it make sense that wages would be sticky...Ch. 25 - Suppose the economy is operating at potential GDP...Ch. 25 - Do you think the Phillips curve is a useful tool...Ch. 25 - Return to the table from the Economic Report of...Ch. 25 - Explain what types of policies the federal...
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Similar questions
- In the Keynesian model, which of the following events lead to an increase in aggregate demand? (This is a multiple answer question. One of more options may be correct) a. An increase in the sales tax b. A new infrastructure project by the Federal government c. An increase in value of the Euro relative to the US-Dollar d. A drop in business confidence.arrow_forwardUsing the AD/AS model, what would be an explanation for observing an increased price level and a decreased real GDP? wages have increased. the money supply has decreased. productivity has increased. the money supply has increased.arrow_forwardIn a Keynesian economy, please show and explain how would reducing marginal tax rates affect income and price levels in the name of AD-AS model.arrow_forward
- Hayek says that markets will heal themselves and that government should not intervene. How does the AD-AS model reflect Hayeks idea that governments cannot increase real GDP beyond the level that the free market economy is able to produce?arrow_forwardIn the AD/AS model, if both inflationary expectations and business taxes increase, then the price level ___ and actual real GDP ___ and employment ___.arrow_forwardinclude a graph that shows where Canada currently is on the business cycle. Also include an AD-AS Model graph that shows if the economy is currently experiencing a recessionary gap, expansionary gap, or long run equilibrium.arrow_forward
- What policy changes would Keynes recommend to counteract a recession?arrow_forwardUse the AD - AS model in the figure below to answer the following questions. Suppose the economy is currently experiencing an inflationary gap, without any government policy intervention, the economy would move from ◻ a) C to D b) B to A c) C to B d) A to E e) E to Aarrow_forwardIn a Keynesian framework, which of the following government policy choices offer a possible solution to recession? A tax increase on consumer income. A surge in military spending. A reduction in taxes for businesses that increase investment. A major increase in what the U.S. government spends on healthcare.arrow_forward
- Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then: a-long-run aggregate supply will decrease. b-aggregate demand will decrease. c-aggregate demand will increase. d-long-run aggregate supply will increase.arrow_forwardThe imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 24.3 shows. a. Identify the (i) equilibrium basing from the AD/AS diagram attached. b. Would you expect unemployment in this economy to be relatively high or low? c. Would you expect concern about inflation in this economy to be relatively high or low? d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium. e. How will the shift in AD affect the original output, price level, and employment?arrow_forwardCreate a graph that shows where Mexico currently is on the business cycle. Be sure to include an AD-AS Model graph that shows if the economy is currently experiencing a recessionary gap, expansionary gap, or long run equilibrium.arrow_forward
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