If an Economy Is Above Potential Output and the Government

question 9

Multiple Choice

If an economy is above potential output and the government opts for a contractionary fiscal policy (running surpluses) to shift AD, an economist with a Classical view who holds the Ricardian equivalence theorem to be practically true would conclude that AD:

• A)shifts to the right due to lower government spending.
• B)shifts to the left due to lower government spending.
• C)does not shift since the lower government spending is offset by higher private consumption.
• D)does not shift since the lower government spending is offset by lower private consumption.

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Definitions:

Excess Burden

Excess Burden, also known as deadweight loss, refers to the cost to society created by market inefficiency, which occurs when supply and demand are out of equilibrium.

Consumers

Individuals or entities that purchase goods and services for personal use.

Widgets

A generic term for any hypothetical manufactured good used in economics or consumer studies.

Consumers

Individuals or entities that purchase goods or services for personal use and not for manufacturing or resale.