Suppose the Economy Is Initially Experiencing a Short-Run Recessionary Gap

question 110

Multiple Choice

Suppose the economy is initially experiencing a short-run recessionary gap. An increase in the size of the budget deficit will

• A)increase the size of the recessionary gap.
• B)reduce the size of the recessionary gap.
• C)lead to an increase in prices with no increase in real GDP.
• D)lead to a decrease in prices with an increase in real GDP.

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Definitions:

Stock Repurchase

The act of a company buying back its own shares from the marketplace, which can reduce the number of outstanding shares and potentially increase share value.

Retained Earnings

The part of a company's earnings that is not distributed as dividends to its shareholders but is instead reinvested or saved.

Dividend Cut

A reduction in the dividend amount paid by a corporation to its shareholders, often due to financial difficulties or the need to conserve cash.

Bird in the Hand Theory

A theory that suggests investors prefer the certainty of dividend payments to the possibility of much higher future capital gains.