The Diagram Below Is for a Closed Economy Which Begins

question 49

Multiple Choice

The diagram below is for a closed economy which begins in long-run equilibrium at Y* and . FIGURE 31-3 Refer to Figure 31-3.Suppose the government implements an expansionary fiscal policy,which increases the budget deficit.The economy's adjustment process returns real GDP to Y* in the long run.Since real GDP is not affected in the long run,how are future generations likely to be harmed by this government policy?

• A)Investment in public infrastructure has been crowded out,which will harm future generations.
• B)Private investment has been crowded out,which may lead to a lower future growth rate of potential GDP.
• C)The inflationary gap is harmful to the economy and reduces real GDP in the future.
• D)The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations.
• E)Future generations are definitely not harmed by this policy.

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Definitions:

Dissociation

A psychological process where a person disconnects from their thoughts, feelings, memories or sense of identity.

Phantom Limb Sensations

The phenomenon where individuals experience sensations, often painful, in a limb that has been amputated.

Kinesthesia

The sense of movement, allowing an individual to sense the position, weight, and movement of the muscles, tendons, and joints.

Synesthesia

A neurological condition in which stimulation of one sensory or cognitive pathway leads to automatic, involuntary experiences in a second sensory or cognitive pathway.