Econ help??

The following questions will examine the short-run and long-run effects of contractionary fiscal policy in the United States. Assume that the contractionary fiscal policy has no effect on potential output, and the Fed does not change its monetary policy reaction function.

7.2. In the long run, decreases in government purchases will ____.

a. Cause consumption to increase

b. Cause planned investment to increase

c. Have no effect on the natural rate of unemployment

d. Have no effect on real income

answers

ABD

A only

B only

ABCD

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Of the options given, the best answer is: ABCD.

[ options ABD, A only or B only are ruled out because they do not contain C because no demand management policy can in the long run alter natural rate of unemployment: only supply side factors can]

Note: Occurrence of disturbances (e.g., cyclical shifts in investment sentiments) will cause actual unemployment to continuously deviate from the natural rate, and be partly determined by aggregate demand factors as under a Keynesian view of output determination. The policy implication is that the natural rate of unemployment cannot permanently be reduced by demand management policies (including monetary policy), but that such policies can play a role in stabilizing variations in actual unemployment.[2] Reductions in the natural rate of unemployment must, according to the concept, be achieved through structural policies directed towards an economy%26#039;s supply side.