Question 1

Assume the economy is in the midst of a severe recession.Which of the following policies would be consistent with discretionary fiscal policy?

Accepted Answer

Reduction in federal tax rates on personal and corporate income would increase disposable income, leading to an increase in consumer spending and business investment, which could help stimulate the economy and reduce the severity of the recession. Choices A, B, and C all involve reducing government spending or increasing government revenue, which could exacerbate the recession by reducing aggregate demand.

Question 2

An economy is experiencing a high rate of inflation.The government wants to reduce GDP by $36 billion to reduce inflationary pressure.The MPC is .75.By how much should the government raise taxes to achieve its objective?

Accepted Answer

To calculate the required change in taxes, we can use the formula:
Change in GDP = - MPC x Change in Taxes
We know the required change in GDP (-$36 billion) and the MPC (0.75). Substituting these values in the formula, we get:
-$36 billion = -0.75 x Change in Taxes
Solving for Change in Taxes, we get:
Change in Taxes = ($36 billion) / (0.75) = $48 billion
Since the government wants to reduce GDP by $36 billion, it will need to reduce aggregate demand (AD) by this amount. One way to do this is by raising taxes, which will reduce disposable income and therefore consumption spending. To achieve a reduction in AD of $36 billion, the government will need to raise taxes by $48 billion (which is equal to the change in taxes calculated above). However, the question asks for how much the government should raise taxes to achieve a reduction in GDP of $36 billion. Since the MPC is 0.75, we know that a $48 billion change in taxes will lead to a change in GDP that is 0.75 times as large, or $36 billion:
Change in GDP = MPC x Change in Taxes
Change in GDP = 0.75 x $48 billion
Change in GDP = $36 billion
Therefore, the government should raise taxes by $12 billion (which is 0.25 times the $48 billion change in taxes needed to reduce AD by $36 billion) to achieve its objective of reducing GDP by $36 billion.

Question 3

Countercyclical discretionary fiscal policy calls for:

Accepted Answer

Countercyclical discretionary fiscal policy aims to stabilize the economy by using deficits during recessions to stimulate demand and create jobs, and surpluses during periods of demand-pull inflation to contract demand and control inflation. Therefore, option B is the correct answer.

Question 4

In an economy, the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .75, then it could:

Accepted Answer

Given that MPC = 0.75, we can use the formula ∆Y = (∆Spending)/MPS where ∆Y = $48 billion and MPS = 0.25 (since MPC + MPS = 1). Solving for ∆Spending, we get ∆Spending = $192 billion. Since the government wants to increase aggregate demand, the best option is to reduce taxes, which is a form of fiscal policy. Using the formula for the tax multiplier (-MPC/MPS), we can calculate that a $16 billion reduction in taxes would increase spending by $48 billion, which meets the government's objective. Therefore, the best choice is to reduce taxes by $16 billion.

Question 5

In an economy, the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment.If the MPS is .4, then it could increase government spending by:

Accepted Answer

To calculate the change in government spending, we need to use the following formula:

∆Y = (1/(1-MPC)) x ∆G

∆Y = $50 billion (given)
MPS = 0.4
MPC = 1 - MPS = 0.6

Substituting these values in the formula, we get:

$50 billion = (1/(1-0.6)) x ∆G
$50 billion = (1/0.4) x ∆G
$50 billion = 2.5 x ∆G
∆G = $20 billion

Therefore, the government could increase its spending by $20 billion to achieve its goal. The correct choice is B.

Question 6

If a government wants to pursue an expansionary fiscal policy, then a tax cut of a certain size will be more expansionary the:

Accepted Answer

A tax cut will be more expansionary if the marginal propensity to save (MPS) is smaller, because this implies a larger marginal propensity to consume (MPC), leading to a greater increase in consumption and aggregate demand.

Question 7

Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP.It could:

Accepted Answer

The answer of Suppose that in an economy with a...

Question 8

An appropriate fiscal policy for a severe recession is:

Accepted Answer

During a severe recession, the government should implement fiscal policies to stimulate economic growth. One effective policy is to decrease tax rates, which increases disposable income for individuals and businesses, encouraging them to spend and invest more. This leads to an increase in aggregate demand, which helps to boost economic activity and employment levels. By contrast, decreasing government spending, appreciating the dollar, and increasing interest rates can all have contractionary effects on the economy, making a recession worse.

Question 9

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

Accepted Answer

In a recession, the economy is not growing, and there is high unemployment. By increasing government spending or decreasing taxation, individuals and businesses will have more money to spend, which can increase demand for goods and services, leading to more production and ultimately more employment. The combination of increased government spending and decreased taxation would provide extra demand in the short term while giving incentives for businesses to invest, leading to increased supply and eventually growth.

Question 10

In a certain year the aggregate demand at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases.Full-employment GDP is $200 billion.To obtain full employment under these conditions the government should:

Accepted Answer

In order to reach full-employment GDP, the government needs to increase overall spending in the economy. Option C would directly increase spending by reducing tax rates and increasing government spending. Option A, encouraging personal saving, would reduce spending in the short-term and could potentially worsen the situation. Option B, decreasing government expenditures, would also reduce overall spending and potentially harm the economy. Option D, discouraging private investment, would also reduce overall spending and potentially lead to a decrease in economic growth.

Question 11

A tax reduction of a specific amount will be more expansionary, the:

Accepted Answer

A larger MPC indicates that households will spend a larger fraction of the tax reduction, leading to a larger increase in aggregate demand and a more expansionary effect. The multiplier effect will also be larger with a larger MPC. The built-in stability of the economy is not directly related to the size of the tax reduction.

Question 12

Within the aggregate demand and aggregate supply framework, fiscal policy that emphasizes activist government policies to stabilize the economy would view cutting personal income taxes as primarily a shift:

Accepted Answer

Cutting personal income taxes would put more money in the hands of consumers, increasing their purchasing power and leading to an increase in aggregate demand. Therefore, it would primarily result in a shift to the right in the aggregate demand curve.

Question 13

An expansionary fiscal policy is shown as a:

Accepted Answer

An expansionary fiscal policy involves increasing government spending or decreasing taxes, which increases aggregate demand in the economy. This is shown as a rightward shift in the economy's aggregate demand curve.

Question 14

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion.If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

Accepted Answer

The current aggregate demand is $555 billion ($400 billion + $40 billion + $90 billion + $25 billion). The economy needs to reach full employment level of $600 billion GDP. To achieve this, the government needs to increase its spending and decrease taxes to stimulate aggregate demand. Choice D, increase government spending and decrease taxes, is consistent with this approach.

Question 15

If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Accepted Answer

The answer of If the MPC in an economy is...

Question 16

In an economy, the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .9, then it could:

Accepted Answer

The answer of In an economy, the government wants to...

Question 17

If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion at each price level by:

Accepted Answer

The marginal propensity to save (MPS) is 0.1, so the marginal propensity to consume (MPC) is 0.9. The spending multiplier is 1/(1-MPC) = 1/0.1 = 10. To shift the aggregate demand by $40 billion, government spending needs to increase by $40 billion / 10 = $4 billion.

Question 18

Which of the following represents the most expansionary fiscal policy?

Accepted Answer

An increase in government spending is the most expansionary fiscal policy because it directly increases aggregate demand in the economy. A tax cut would also increase disposable income and potentially stimulate spending, but it may not be as immediate and direct as an increase in government spending. A tax increase or a decrease in government spending would have the opposite effect and be contractionary fiscal policies.

Question 19

In an aggregate demand and aggregate supply graph, an expansionary fiscal policy can be illustrated by a:

Accepted Answer

An expansionary fiscal policy involves increasing government spending and/or decreasing taxes, which stimulates consumer spending and investment. This leads to an increase in aggregate demand, which can be illustrated by a rightward shift in the AD curve. A leftward shift in the AD curve would indicate a decrease in aggregate demand, which is the opposite of an expansionary fiscal policy. A leftward shift in the AS curve would indicate a decrease in productivity or increase in costs, which is not directly related to fiscal policy. A change in the price level could result from various factors and does not necessarily indicate a fiscal policy action.

Question 20

If the government wishes to increase the level of real GDP, it might reduce:

Accepted Answer

The answer of If the government wishes to increase the...

Quiz 13: B: Fiscal Policy, Deficits, Surpluses, and Debt