If an economy is in a recession and the government opts for an expansionary fiscal policy to shift the AD curve closer to the potential output, a sound finance economist with a Classical view, who holds the Ricardian equivalence theorem to be practically true, would conclude that the AD curve:
A. does not shift since the higher government spending is offset by higher private consumption.
B. does not shift since the higher government spending is offset by lower private consumption.
C. shifts to the left due to higher government spending.
D. shifts to the right due to higher government spending.
Answer: B
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The interest parity condition indicates that the interest differential is equal to the
A) risk premium. B) forward premium. C) futures premium. D) arbitrage premium.
The SRAS curve is upward sloping, there is a liquidity trap, and investment spending is sensitive to changes in the interest rate. According to the monetarist transmission mechanism, if the money supply increases the AD curve __________ and the price level __________
A) does not change; does not change B) shifts to the left; falls C) shifts to the right; rises D) does not change; rises E) none of the above