Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?
A. The multiplier process will contribute to an additional increase in aggregate demand that will cause an inflationary gap.
B. The price level is constant.
C. The government can increase taxes to create an additional increase in aggregate demand.
D. Price level changes will make up for the difference between the fiscal stimulus and the AD shortfall.
Answer: A
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If a bank holds 100 percent of its deposits as reserves, then: a. it cannot make a loan
b. it cannot accept a deposit. c. it cannot allow a withdrawal. d. it cannot be taxed by the government.