If a Contraction in Aggregate Demand Causes a Recession, the Great

question 11

Multiple Choice

If a contraction in aggregate demand causes a recession, the Great Moderation consensus on macroeconomics suggests that:

• A) fiscal discipline with a balanced budget eventually stimulates aggregate demand.
• B) fiscal policy should take the leading role in economic stabilization.
• C) the use of discretionary fiscal policy is counterproductive except in special circumstances.
• D) monetary discipline with a reduction in the money supply eventually stimulates aggregate demand.

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Definitions:

Average Propensity

The average tendency of an entity (such as a household) to spend a portion of income; can pertain to consumption or saving.

Disposable Income

Disposable income is the portion of an individual's or household's earnings left over for savings and expenditures after paying off income taxes.

Autonomous C

Autonomous consumption, the level of spending not influenced by current levels of income.

Induced C

Induced consumption, which refers to the spending by households that varies with income levels.