Macroeconomics Policy Impact Analysis

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What is the effect of further increasing production in an economy close to its full capacity limit?

Stabilizes the general price level

Leads to a significant change in production

Causes higher prices without a significant change in production (correct)

Results in lower prices

In an economy operating at point B on the aggregate supply curve, what happens when an expansionary policy is implemented?

Results in no change in either production or prices

Creates a large increase in production and a small increase in prices

Leads to a small increase in production and a larger increase in prices (correct)

Causes a decrease in both production and prices

When implementing an economic policy to reduce inflation from 5% to 2%, what is the targeted impact on aggregate demand?

No effect on aggregate demand

Increase aggregate demand (correct)

Create stability in aggregate demand

Decrease aggregate demand

What was the view of many economists about inflation thirty years ago?

Inflation was considered a minor inconvenience Signup and view all the answers

Why is it important to consider the state of the economy before implementing an economic policy?

To know where the economy stands on the aggregate supply curve Signup and view all the answers

What happens to the equilibrium level of income when an expansionary policy is applied at point B on the aggregate supply curve?

Increases from Y0 to Y1 Signup and view all the answers

What is the effect of an expansionary policy when the economy is operating in the horizontal part of the AS curve?

Small increase in prices and large increase in production Signup and view all the answers

What happens to the equilibrium price level when shifting the AD curve to the right under an expansionary policy?

Increases from P0 to P1 Signup and view all the answers

Which factor is prioritized in the horizontal part of the AS curve when implementing an expansionary policy?

Increase in production Signup and view all the answers

What is the key consideration when determining the impact of economic policies on the economy based on the AS curve?

AS curve shape Signup and view all the answers

What is the primary reason for having two main points of consideration regarding the AS curve when analyzing economic effects?

To understand differences in price and production reactions Signup and view all the answers

In which direction does an expansionary policy shift the AD curve?

Right Signup and view all the answers

According to Keynesian economists, what is the shape of the short-run aggregate supply curve at low levels of production?

Horizontal, indicating no change in prices as output increases Signup and view all the answers

Why do Keynesian economists argue that firms are more likely to increase output rather than prices in response to rising demand at low levels of production?

Firms have excess capacity and can meet rising demand by utilizing idle resources Signup and view all the answers

What type of unemployment is associated with the low levels of production described in the text?

Cyclical unemployment Signup and view all the answers

What happens to the shape of the short-run aggregate supply curve as the economy moves from underemployment to full employment?

It becomes upward-sloping Signup and view all the answers

What is the primary factor that shapes the short-run aggregate supply curve, according to the text?

Firms' production and pricing decisions in response to demand changes Signup and view all the answers

What type of economic policy is mentioned in the text as a way to increase aggregate demand?

Expansionary monetary policy Signup and view all the answers

Macroeconomics Policy Impact Analysis

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