The Diagram Below Is for a Closed Economy Which Begins

question 53

Multiple Choice

The diagram below is for a closed economy which begins in long- run equilibrium at Y*.
FIGURE 32- 3
-Refer to Figure 32- 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)The inflationary gap is harmful to the economy and reduces real GDP in the future.
• B)Future generations are definitely not harmed by this policy.
• C)Investment in infrastructure has been crowded out, which will harm future generations.
• D)Private investment has been crowded out, which may lead to a lower future growth rate of potential GDP.
• E)The budget deficit causes an appreciation in the domestic currency which reduces the income of future generations.

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Definitions:

Shareholder

An individual or entity that owns shares in a corporation, thus holding a portion of its equity.

Direct Flotation Costs

Expenses directly incurred by a company when it issues new securities, such as underwriting fees, legal fees, and registration fees.

Offering Size

The total value or amount of securities, such as stocks or bonds, that are made available for sale in a public offering.

Gross Proceeds

The total amount of money received from a transaction before any deductions or expenses are subtracted.