Exam Prep 2.0

Question 1

Assume that the economy is in a recession with a price level of P1 and
output level Y1. The government then adopts an appropriate discretionary
fiscal policy. What will be the most likely new equilibrium price level and
output?

Answer 1

P2 and Y2 anything that goes up against demand

Question 2

Assume that the full-employment level of output is $1,000 and the price
level associated with full-employment output is 100. Also assume that the
economy’s current level of output is $1,100 and, at the price level of 100,
current aggregate demand is $1,200. If the government moves the economy
back to the full-employment level of output by reducing government
purchases by $50, then the expenditures multiplier equals
A) 2.
B) 5.
C) 4.
D) 10.
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