Suppose Real and Potential GDP Are Initially Equal

question 32

Multiple Choice

Suppose real and potential GDP are initially equal. If government purchases change, which of the following best explains what will happen first?

• A)Potential GDP will change by the same amount as aggregate expenditure.
• B)The AD curve will shift.
• C)Both the AD curve and the IA line will shift.
• D)The IA line will shift.
• E)There will be movement along the AD curve.

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Definitions:

FICA Taxes

FICA Taxes are payroll taxes collected to fund the Social Security and Medicare programs, split between the employer and the employee.

Payroll Tax Expense

The taxes that employers are required to withhold and pay on behalf of their employees, including Social Security and Medicare taxes.

State Unemployment Taxes

Taxes paid by employers to the state to fund unemployment insurance programs for workers who have lost their jobs.

Federal Unemployment Taxes

Taxes imposed by the federal government on employers to fund unemployment benefits for workers who have lost their jobs.