The Diagram Below Shows the Budget Deficit Function for a Government

question 100

Multiple Choice

The diagram below shows the budget deficit function for a government in a hypothetical economy. FIGURE 31-1 Refer to Figure 31-1.Initially,suppose real GDP is $100 million and the budget deficit is $4 million,as shown by point A on the graph.Which of the following is consistent with a move from point A to point B?

• A)implementation of an expansionary fiscal policy
• B)implementation of a contractionary fiscal policy
• C)implementation of a contractionary monetary policy
• D)the economy entering into a recession
• E)the economy entering into a boom

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Definitions:

Short-Run Phillips Curve

The Short-Run Phillips Curve depicts an inverse relationship between unemployment and inflation in the short term, indicating that lower unemployment can come with higher inflation.

Monetary Policy

The process by which a government, central bank, or monetary authority manages the money supply to achieve specific goals, such as controlling inflation, maintaining employment, and stabilizing the currency.

Short-Run Phillips Curve

A curve that illustrates a short-term trade-off between inflation and unemployment, suggesting lower unemployment can come at the cost of higher inflation.

Financial Crisis

A broad term for a situation when financial assets rapidly lose a significant part of their nominal value.