1. What is the mechanism by which an increase in government spending or a tax cut stimulates the economy?
A) Government purchases of goods and services increase aggregate demand, boosting equilibrium output.
B) Individuals and families who receive tax cuts increase their expenditures.
C) These policies create demand for goods and thereby expand employment and output.
D) All of the above
2. Government borrowing can “crowd out” private investment by…
A) increasing aggregate demand.
B) increasing the interest rate for loanable funds.
C) reducing the quantity of loanable funds available for private investment.
D) Both b. and c.