Answer:
1. a. The decrease in net exports will cause a <u>decrease in aggregate demand.</u>
b. This will lead to a <u>decrease</u> in the price level and <u>a decrease</u> in real GDP.
c. <u>Expansionary </u>fiscal policy will be used to <u>reduce unemployment.</u>
d. The fiscal policy actions may include <u>a decrease</u> in taxes and/or <u>an increase </u>in government purchases.
e. The goal of fiscal policy is to <u>smooth out business cycles</u>.
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2. a. The increase in gross investment will cause <u>an increase in aggregate demand.</u>
b. This will lead to <u>an increase</u> in the price level <u>an increase</u> in real GDP.
c. <u>Contractionary fiscal</u> policy will be used to <u>reduce inflation.</u>.
d. The fiscal policy actions may include <u>an increase</u> in taxes and/or <u>a decrease </u>in government purchases.
e. The goal of fiscal policy is to <u>smooth out business cycles</u>.
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3. C. In order to increase spending on infrastructure, the federal government decides to borrow funds.
Crowding out occurs when the government borrows a significant amount of loanable funds such that interest rates rise and private firms are unable to afford the new rates so borrow less.
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4. B. Making economic investments.
With private firms unable to borrow much in a crowding out scenario, they will be unable to use those funds to invest in the economy.