Which of the following best explains why equilibrium income will rise by more than $100 in response to a $100 increase in government spending?
A) incomes will rise resulting in a tax decrease
B) incomes will rise resulting in higher consumption
C) The increased spending raises the aggregate price level
D) The increased spending increases the money supply, lowering interest rates
E) The higher budget deficit reduces investment
Answer: B) incomes will rise resulting in higher consumption
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When the government chooses to spend the tax dollars that it collects on homeland security, its choice
A) involves a tradeoff of other goods and services such as education for more homeland security. B) illustrates that scarcity does not always exist. C) involves no tradeoff because the defense is necessary. D) primarily affects who gets the goods and services produced.
Pure inflation occurs when
A) nominal wages rise faster than all prices. B) all prices rise faster than nominal wages. C) all prices and nominal wages rise by the same percentage. D) the GDP deflator and Consumer Price Index rise by the same percentage. E) none of the above