If government increases the size of its full-employment surplus, we can:
A)assume that government is causing interest rates to rise.
B)not determine government's impact on the economy without also knowing the status of the actual budget.
C)assume that government is having a contractionary effect on the economy.
D)assume that government is having an expansionary effect on the economy.

Question

Quizplus · Accepted Answer

An increase in the full-employment surplus means that the government is cutting spending or increasing taxes, both of which would decrease aggregate demand and have a contractionary effect on the economy. Therefore, we can assume that government is having a contractionary effect on the economy. The other choices are not necessary implications of an increase in the full-employment surplus.

If Government Increases the Size of Its Full-Employment Surplus, We