Refer to the ?Gure $A D _ { 2 }$ And That the Full-Employment Level of Output Is Y

question 76

Multiple Choice

Refer to the ?gure. Suppose that the economy is currently operating at the intersection of AS and AD $A D _ { 2 }$ and that the full-employment level of output is Y. If contractionary ?scal policy and accompanying
Multiplier effects move aggregate demand from AD
$A D _ { 2 } \text { to } A D _ { 1 }$ , what will be the effect on real GDP and the
Price level?

• A) Real GDP will fall to Y and the price level will fall to \(P _ { 0 }\) , assuming in?exible prices.
• B) Real GDP will fall to X and the price level will remain unchanged, assuming prices are in?exible downward.
• C) Real GDP will fall to X and the price level will fall to \(P _ { 0 }\) , assuming in?exible prices.
• D) Real GDP will fall to Y and the price level will remain unchanged, assuming in?exible prices.

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Definitions:

Accrued Expense

An accounting term for expenses that have been incurred but not yet paid, recorded on the books to reflect true financial position.

Salary Owed

The amount of payment due to employees for services rendered that has not yet been paid.

Accumulated Depreciation

The total amount of a tangible asset's cost that has been allocated as depreciation expense over the asset's useful life, reducing its book value on the balance sheet.

Balance Sheet

A statement that displays the financial condition of a company, detailing assets, liabilities, and the equity of its shareholders at a given time.