ECONOMICS (CBSE/UGC NET)

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ECONOMICS

AGGREGATE DEMAND

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ____ in the unemployment rate in the short run and ____ in inflation in the short run, everything else held constant.
A
an increase; an increase
B
a decrease; a decrease
C
a decrease; an increase
D
an increase; a decrease
Explanation: 

Detailed explanation-1: -The three ways to reduce the budget deficit are to cut non-interest government outlays, to increase tax or other revenue, and to reduce the rate of interest on the government debt.

Detailed explanation-2: -If the U.S. government’s budget deficits are increasing aggregate demand, and the economy is producing at a level that is substantially less than potential GDP, then: the central bank might react with an expansionary monetary policy.

Detailed explanation-3: -This deficit reduction caused lower growth, recession and unemployment. Increasing national debt. A budget deficit increases the level of public sector debt. Large deficits will cause national debt as a % of GDP to increase.

Detailed explanation-4: -Governments could borrow money and increase spending as part of a targeted fiscal policy. An expansionary fiscal policy leads to higher budget deficits while a contractionary policy reduces deficits.

There is 1 question to complete.
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