Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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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?

  1. A tax Increase on consumer income.
  2. A surge in military spending.
  3. A reduction in (axes for businesses that Increase investment.
  4. 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? Group of answer choices wages have increased. productivity has increased. the money supply has increased. the money supply has decreased.
In the Keynesian framework, which of the following events might cause a recession? Group of answer choices none of the above tax rates fall interest rates fall foreign lenders flood the US market to make home loans
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