ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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the real GDP growth rate is larger than the price level
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wages do not initially respond when aggregate demand fluctuates
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the multiplier effect is larger than the unemployment rate
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potential GDP is less important
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wages fall during an economic expansion
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Detailed explanation-1: -Keynes also noticed that when AD fluctuated, prices and wages did not immediately respond as economists expected. Instead, prices and wages were “sticky, ” making it difficult to restore the economy to full employment and potential GDP.
Detailed explanation-2: -The main plank of Keynes’s theory, which has come to bear his name, is the assertion that aggregate demand-measured as the sum of spending by households, businesses, and the government-is the most important driving force in an economy.
Detailed explanation-3: -A Keynesian believes that aggregate demand is influenced by a host of economic decisions-both public and private-and sometimes behaves erratically. The public decisions include, most prominently, those on monetary and fiscal (i.e., spending and tax) policies.
Detailed explanation-4: -This Keynesian view of the AD/AS model shows that with a horizontal aggregate supply, a decrease in demand leads to a decrease in output but no decrease in prices.
Detailed explanation-5: -Keynes’ Law states that demand creates its own supply; changes in aggregate demand cause changes in real GDP and employment. The Keynesian zone occurs at low levels of output on the SRAS curve where it is fairly flat, so movements in aggregate demand will affect output but have little effect on the price level.