These graphs describe the competitive dynamic model.
Suppose that, in order to finance a government- sponsored health plan, the government needs to increase spending by 10%. The government plans to finance the higher spending with an increase in taxes.
1. Suppose that the change in aggregate demand (if any) is stronger than the change in the supply (if any). Then, this government policy generates
a) an increase in output and an increase in the interest rate
b) an increase in the output and a decrease in the interest rate
c) a decrease in output and an increase in the interest rate
d) a decrease in output and a decrease in interest rate
2. And it also generates:
a) an increase in employment and an increase in wages
b) an increase in employment and a decrease in wages
c) a decrease in employment and an increase in wages
d) a decrease in employment and a decrease in wages
3. Aggregate consumption and aggregate investment:
a) both increase
b) both decrease
c) do not change
d) consumption decreases but investment increases
4. This example illustrates that an increase in government spending
a) boosts private investment
b) crowds-out private consumption and private investment
c) decreases aggregate output
d) makes consumers in the economy better off