Real case from my personal life: in the UK the income tax rates are proportional: the more you earn,the more you pay to the government in the form of taxes. A friend of my parents who is rather oldand experienced earn such a great amount of money so that the further increase in his wage willlower his after-tax profit. So he found a compromise with his employer: instead of getting an extraincome he got an extra weekend: he works less but earn the same amount of money (theoreticallyspeaking high tax rate lowered L => AS decreases). 11. Which of the following will most likely result from a decrease in government spending? (A) An increase in output.(B) An increase in the price level.(C) An increase in employment.(D) A decrease in aggregate supply.(E) A decrease in aggregate demand.Comment: G decreases, AD decreases, there is an excess supply on goods market => firmsaccumulate Iun and decrease Y => it gives a downward pressure on a price. See a comment in 9about G and AS 12. If government spending increases, the aggregate demand (AD) curve will 13. If government purchases of goods increase, the aggregate supply (AS) curve will 14. Expansionary fiscal policy would best be prescribed to
15. Which of the following policies would a Keynesian recommend during a period of highunemployment and low inflation? (A) Imposing wage and price controls to stimulate aggregate supply.Comment: Keynesian approach is about stimulating AD not AS(B) Balancing the budget to stimulate aggregate supply.Comment: BB policy can be used by Keynesian economists but it will stimulate AD not AS(C) Decreasing the money supply to reduce aggregate demand.Comment: it’s an approach of a monetarist not Keynesian economist(D) Decreasing taxes to stimulate aggregate demand.(E) Decreasing government spending to stimulate aggregate supply.Comment: would be correct if it was about stimulating AD not AS
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