Suppose That the Economy Is Experiencing an Expansionary Gap of $1,000

question 116

Multiple Choice

Suppose that the economy is experiencing an expansionary gap of $1,000 and the MPC equals 0.8.With an upward-sloping short-run aggregate supply curve,the government can close the gap if it decreases purchases by

• A)$1,000
• B)$800
• C)$200
• D)more than $200
• E)less than $200

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Definitions:

Price Level

An index that measures the average price of consumer goods and services, reflecting the purchasing power of a country's currency.

Foreign Exchange Rate

The price at which one currency can be exchanged for another in the international currency markets.

Velocity

In economics, the rate at which money circulates in the economy, typically measured as the ratio of gross national product to the total supply of money.

Money Supply

The sum total of available financial assets in an economy at a particular time slot.