If Aggregate Demand Intersects Aggregate Supply in the Vertical Range

question 83

Multiple Choice

If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things being equal, an increase in government spending will

• A) raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
• B) lower real GDP by an amount equal to the spending increase and reduce inflation.
• C) raise the price level and leave real GDP unchanged.
• D) raise both real GDP and the price level by a multiple of the initial spending increase.
• E) have no effect on real GDP or the price level because all private investment will be crowded out.

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Definitions:

Convertible Bonds

Bonds that can be converted into a predetermined amount of the issuing company's equity at certain times during the bond's life, usually at the discretion of the bondholder.

Fair Market Values

The price at which an asset would change hands between willing and informed buyers and sellers in an arm's length transaction.

Conversion Terms

Conditions that specify the circumstances under which a financial instrument may be converted into another, typically from debt to equity.

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