​ Exhibit 16-4 Macro AD/AS Model

question 107

Multiple Choice

​ Exhibit 16-4 Macro AD/AS Model

As shown in Exhibit 16A-4, assume the marginal propensity to consume equals 0.80.  Using discretionary fiscal policy, federal government spending should be _________  in order to restore the economy from E ₁ to full employment.

• A) increased by $1.6 trillion
• B) decreased by $1.6 trillion
• C) increased by $.20 trillion
• D) decreased by $.20 trillion

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Definitions:

Comparative Advantage

The ability of a country or firm to produce a particular good or service at a lower opportunity cost than its competitors.

Absolute Advantage

The ability of an entity to produce more of a good or service with the same amount of resources than another entity.

Opportunity Cost

The price paid for not selecting the best available alternative when deciding.

Bushel

A unit of volume that is used primarily in the United States to measure agricultural commodities, equivalent to approximately 35.24 liters.