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Question
Three candidates for political office disagree over the benefits of enlarging the federal budget deficit. Candidate C says the stimulation package is needed to increase employment and real GDP; Candidate D says it will only cause higher prices; and Candidate F says it will have no effect on either real GDP or the price level. How do the three candidates differ with respect to the condition of the economy and the effects of fiscal policy?
A) Candidate C thinks the simple Keynesian model is applicable, while D thinks the expansionary policy will fully crowd out private investment. F believes the economy is experiencing a recessionary gap.
B) Candidate C thinks the simple Keynesian model is applicable; D thinks the short -run aggregate supply curve is horizontal; and F thinks the expansionary policy will generate lower interest rates.
C) Candidate C thinks the economy is below the full -employment real GDP and that the short-run aggregate supply curve is horizontal. Candidate D believes the economy is at full employment. Candidate F believes the expansionary policy will result only in direct fiscal offsets.
D) Candidate C thinks the short-run aggregate supply curve is upward sloping; D thinks interest rates will rise; and F thinks the economy is at full employment.
Answer
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