Chapter 45, Problem 5MCQ

To determine

The correct option depicting the impact on aggregate demand and aggregate supply in the short run if the Mexican government pursues an expansionary fiscal policy in response to the recession.

Answer to Problem 5MCQ

Option e is correct.

Explanation of Solution

Explanation for the correct option:

e.

As the government pursues an expansionary policy, there will be an increase in aggregate demand and no change in the short-run aggregate supply. This is because, due to expansionary policy, there will be an increase in the demand but to compensate for the demand, the economy cannot immediately uplift it to produce more goods as resources are not available immediately. Therefore, option e is the correct answer.

Explanation for incorrect options:

a.

The government pursued an expansionary policy to deal with the existing recession, which will increase the demand and supply will remain the same. Therefore, option a is incorrect

b.

Short-term aggregate supply will remain unchanged as resources are limited. Therefore, option b is incorrect.

c.

There will be an increase in demand rather than a decrease if the expansionary policy is pursued. Therefore, option c is incorrect.

d.

Demand will increase but supply in the short run will not be changed during the recession. Therefore, option d is incorrect.

Economics Concept Introduction

International trade: International trade is an exchange of goods and services across nations. This is due to globalization and comparative advantage. It means goods are produced in one country and are sold in some other country.