A.An increase in investment according to the Keynesian model will increase aggregate demand. Keynesians
believe that spending increases demand and that demand creates supply.
A.An increase in government spending increases aggregate demand and pulls an economy out of a recession (in
theory).
B.An increase in productivity shifts the long-run aggregate supply curve to the right because firms are increasing
output.
B.A basic premise of Classical economics is that the economy is self-correcting. Classicalists believe that the
natural forces of supply and demand will correct the economy in a time of macroeconomic disequilibrium.
E.A decrease in government spending will result in a decrease in aggregate demand. Government spending
helps consumers increase purchasing power.
A.If a large increase in total spending has no effect on GDP, the economy must be in range 3, and only the price
level is rising. The economy is at productive capacity and any increase in spending at this point would have no
effect of GDP; rather, it would only increase the price level.
E.A decrease in the marginal propensity to save results in an increase in the marginal propensity to consume.
When the marginal propensity to consume increases, the multiplier increases.
E.An increase in defense spending creates more jobs and increases purchasing power for consumers. This
increase in purchasing power benefits the economy in the long run by providing employment and growth.
C.Discretionary fiscal policy means that the government has chosen to take an “active” role in policymaking for
the economy. Raising taxes is an active role in policymaking.
C.Deficit spending is when the government is spending more money than it is taking in with tax revenue. When
tax revenues do not cover government spending, the government has to deficit-spend.
E.Since the government can’t really finance a budget deficit by increasing taxes, the government borrows money
from the loanable funds market to finance an increase in spending.
C.Fiscal policy involves government spending and altering taxation to increase or decrease aggregate demand.
Inflation and lack of growth are the two problems the government attempts to alter with fiscal policy.
C.To fight a recession, the government enacts expansionary fiscal policy, which means decreasing taxes and/or
increasing government spending.
D. Increasing taxes would take away disposable income from consumers and decrease aggregate demand. Once
aggregate demand falls, the price level is contained.
A.All things constant, an increase in the price level will allow firms to employ more workers and increase supply.
Typically, an increase in productivity decreases unemployment.
