The Diagram Below Is for a Closed Economy Which Begins

question 124

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:

Production Possibilities Curve

A graphical representation showing the maximum quantity of two goods that can be produced with fixed resources and technology, demonstrating the trade-offs in production.

Unemployment

A condition where people who have the ability and desire to work are unable to secure jobs.

Production Possibilities Frontier

A curve depicting the maximum attainable combinations of two or more products that may be produced with available resources and technology.

Inward Shift

Describes a decrease in the potential output of an economy, often visualized as a leftward shift of the Production Possibility Frontier (PPF).