The Diagram Below Shows an AD/AS Model for a Hypothetical

question 36

Multiple Choice

The diagram below shows an AD/AS model for a hypothetical economy which is initially in a short-run equilibrium at point A. FIGURE 24-6
-Refer to Figure 24-6.The government could close the existing output gap by

• A)increasing the net tax rate.
• B)decreasing the net tax rate.
• C)decreasing government purchases.
• D)decreasing government transfer payments.
• E)implementing a contractionary fiscal policy.

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Definitions:

Planned Aggregate Expenditure

The total amount households, businesses, and the government plan to spend on goods and services at different levels of national income.

Production

The process of combining various material inputs and immaterial inputs (plans, know-how) to make something for consumption (the output).

Inventories

Goods and materials that a business holds for the purpose of sale or production in the future.

Autonomous Investment

Investment that is not influenced by the current level of income or production, often driven by technological innovations or changes in policy.