Suppose the Economy Is Operating Below Potential Output

question 105

Multiple Choice

Suppose the economy is operating below potential output. If policy makers try to avoid a budget deficit by raising taxes or reducing government spending, these actions would

• A) increase inflation.
• B) help pull an economy out of a depression.
• C) make a recession worse.
• D) negate the multiplier effect.

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Definitions:

Education

The process of receiving or giving systematic instruction, especially at a school or university, that aims to improve knowledge and develop skills.

Wage Rate

The amount of money paid for a specific unit of time or work, often expressed per hour or per piece of work done.

Fallacy of Composition

The incorrect belief that what is true for the individual is necessarily true for the group as a whole.

Empirical Measure

A quantitative determination obtained through observation and experimentation rather than theory.