Suppose the Economy Is Initially in Equilibrium at Point a in the Figure

question 98

Multiple Choice

Suppose the economy is initially in equilibrium at point A in the figure below. A decrease in investment expenditures causes the AD curve to shift back to AD₂. Under these circumstances, which of the following statements is true?

• A)If the countercyclical fiscal policy is made at the correct time, the AD curve will shift to AD₄.
• B)If there is no countercyclical fiscal policy, the AD curve will shift to AD₄.
• C)If there is no countercyclical fiscal policy, the AD curve will shift back to AD₁.
• D)If the countercyclical fiscal policy is timely enough, the AD curve will shift to AD₃.
• E)If there is no countercyclical fiscal policy, the IA line will shift up.

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Definitions:

Excess Demand

A situation in a market where the quantity demanded of a good or service surpasses the quantity supplied at the current price, leading to upward pressure on prices.

Market Equilibrium

The state in which market supply equals market demand, and prices have no tendency to change, assuming all other factors remain constant.

Excess Supply

A situation in which the quantity of a good or service provided exceeds the quantity demanded at a given price.

Market Equilibrium

A state where the supply of a product matches its demand, resulting in stable prices.