Question 1

Figure 12-3 -Refer to Figure 12-3.If the aggregate demand curve is AD₁, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Accepted Answer

Given that the aggregate demand curve is positioned as AD₁, the most appropriate fiscal policy would be an expansionary one to stimulate economic growth. This involves increasing government spending and providing incentives for investment, such as increasing investment tax credits.

Question 2

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion.Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion.This contractionary action

Accepted Answer

The decrease in investment spending of $100 billion would lead to a decrease in aggregate demand by a multiple of the initial change due to the multiplier effect. Since the multiplier is 1.2, the overall decrease in aggregate demand would be $120 billion (=$100 billion x 1.2). Therefore, the aggregate demand curve would shift to the left by $120 billion.

Question 3

Suppose a country increases government purchases by $700 billion.Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion.This policy action shifts the aggregate demand curve to the right by

Accepted Answer

The government spending multiplier is 2, which means that for every $1 increase in government spending, aggregate demand will increase by $2. Therefore, an increase in government purchases by $700 billion will increase aggregate demand by $1,400 billion (2 x $700 billion). 
However, this does not mean that the aggregate demand curve will shift to the right by $1,400 billion. The initial real GDP level is $6,000 billion, so the increase in aggregate demand will lead to a new equilibrium real GDP level that is higher than $6,000 billion. 
The exact increase in equilibrium real GDP will depend on the slope of the aggregate supply curve. If the aggregate supply curve is relatively flat, then the increase in equilibrium real GDP will be larger. Conversely, if the aggregate supply curve is relatively steep, then the increase in equilibrium real GDP will be smaller. 
Without more information on the slope of the aggregate supply curve, we cannot determine the exact increase in equilibrium real GDP. Therefore, the best answer is C, which only provides the increase in aggregate demand.

Question 4

Suppose a country institutes an investment tax credit and that leads to an increase in investment spending of $100 billion.Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion.This action is

Accepted Answer

The increase in investment spending of $100 billion will have a multiplied effect on GDP, which is $100 billion multiplied by the multiplier of 1.5, resulting in a $150 billion increase in GDP. This increase in GDP will lead to an increase in aggregate demand, and since the initial increase in investment spending was caused by a government policy, it is an expansionary policy. However, the shift in the aggregate demand curve will not be equal to the increase in GDP, as other factors can shift the curve in the opposite direction. Thus, the aggregate demand curve will shift to the right by $1,500 billion, which is the result of the multiplied increase in investment spending ($150 billion) divided by the marginal propensity to consume (0.75, which is the inverse of the multiplier) or $150 billion/0.75.

Question 5

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Accepted Answer

An increase in transfer payments results in households saving part of the increase in income, while the entire increase in government purchases represents additional spending. This means that a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases.

Question 6

Consider two fiscal policy actions.
I.a $400 billion reduction in income taxes
II.a $400 billion increase in government purchases
Which policy will have a bigger impact on aggregate demand?

Accepted Answer

Policy II will have a bigger impact on aggregate demand because it directly affects government purchases, which are a component of aggregate demand. Policy I works through consumption, which is a component of aggregate demand, but the degree to which it affects consumption depends on the marginal propensity to consume of households, which may vary. Therefore, Policy II is the better choice for directly impacting aggregate demand.

Question 7

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Accepted Answer

A change in government purchases will have a multiplied effect on aggregate demand due to the spending multiplier. The spending multiplier is equal to 1/(1-MPC), where MPC is the marginal propensity to consume. Therefore, the change in government purchases is equal to the spending multiplier multiplied by the initial change in government purchases (F1F1F1S1 x F1F1F10).

Question 8

Figure 12-3 -Refer to Figure 12-3.Suppose the aggregate demand curve is AD₁.All of the following events Would bring the economy back to the natural rate of unemployment except

Accepted Answer

The government ordering a one-time surcharge of 10% on individual income tax liabilities would decrease disposable income and aggregate demand, making it less likely for the economy to return to the natural rate of unemployment. The other options would increase aggregate demand, which could help bring the economy back to the natural rate of unemployment.

Question 9

Suppose that when income taxes are reduced by $400 billion, households increase consumption
By 80% of the resulting change in disposable income.Suppose also that the multiplier is 2.At a given price level, the aggregate demand curve shifts to the right by

Accepted Answer

The initial change in income taxes is $400 billion, and since the households increase consumption by 80% of the resulting change in disposable income, the initial increase in disposable income is:
80% x $400 billion = $320 billion
The multiplier is 2, so the total increase in aggregate demand is:
2 x $320 billion = $640 billion
Therefore, the aggregate demand curve shifts to the right by $640 billion. The correct answer is choice C.

Question 10

The immediate impact of instituting investment tax credits is

Accepted Answer

Instituting investment tax credits encourages private sector investment, which in turn increases aggregate demand by creating more jobs and increasing overall economic activity. This stimulates economic growth and can lead to a decrease in unemployment.

Question 11

An increase in government transfer payments will shift the aggregate demand curve to the right

Accepted Answer

The answer of An increase in government transfer payments will...

Question 12

Figure 12-2
 
-Refer to Figure 12-2.If discretionary fiscal policy is used to eliminate the gap, policy actions
Will

Accepted Answer

Discretionary fiscal policy involves changes in government spending or taxes, which affect aggregate demand. In this case, since there is a recessionary gap, the policy actions would aim to increase aggregate demand. This would involve shifting the aggregate demand curve to the right, not the left as options B, C, and D suggest. Option A correctly identifies that the aggregate demand curve should be shifted to the left until long-run equilibrium is restored, which would result in a new equilibrium point at P_j and Y_p.

Question 13

Suppose that income taxes are increased by $600 billion.If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

Accepted Answer

The formula for the spending multiplier is 1/(1-MPC). 
Given the MPC = 0.75, then the spending multiplier is 1/(1-0.75) = 4.
The initial change in income taxes is $600 billion. 
Therefore, the total change in aggregate demand will be:
$600 billion * MPC * spending multiplier = $600 billion * 0.75 * 4 = $1,800 billion 
Thus, the correct answer is (B) $1,800 billion.

Question 14

Figure 12-2 -Refer to Figure 12-2.Assume that the economy is initially at Y_r.A nonintervention policy Would return the economy to its potential output by

Accepted Answer

A nonintervention policy would allow the economy to adjust on its own without any interference from the government. In this case, the economy is already producing above its potential output (YS1) which implies that there is upward pressure on prices causing inflation. Therefore, the short-run aggregate supply needs to shift to the left to bring output back to potential level. This could happen due to factors such as wage stickiness or increase in input prices. As the short-run aggregate supply curve shifts to the left, the equilibrium output (U1) will decrease and the equilibrium price level (P1) will increase until the economy reaches its potential level of output.

Question 15

Suppose the government increases in the corporate income tax rate.This is

Accepted Answer

The answer of Suppose the government increases in the corporate...

Question 16

Suppose the government institutes a new investment tax credit.This is likely to

Accepted Answer

The answer of Suppose the government institutes a new investment...

Question 17

Suppose a country decreases government purchases by $400 billion.Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion.This contractionary policy action shifts the aggregate demand curve to the left by

Accepted Answer

The answer of Suppose a country decreases government purchases by...

Question 18

Suppose that income taxes are reduced by $400 billion and households increase consumption by
80% of the resulting change in disposable income.Suppose also that the multiplier is 2.
What is the marginal propensity to consume?

Accepted Answer

The answer of Suppose that income taxes are reduced by...

Question 19

Figure 12-3 -Refer to Figure 12-3.If the aggregate demand curve is AD₀, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Accepted Answer

The answer of Figure 12-3
 
-Refer to Figure 12-3.If the...

Question 20

Suppose the economy is in long-run equilibrium.If the federal government cuts government
Spending, which of the following is likely to result?

Accepted Answer

If the federal government cuts government spending, aggregate demand in the economy will decrease, leading to a decrease in both real GDP and the price level in the short run. This will also result in a decrease in the demand for labor, leading to an increase in unemployment. Therefore, choice D (a decrease in the price level and an increase in unemployment) is the correct answer.

Quiz 27: Government and Fiscal Policy

Figure 12-3 -Refer to Figure 12-3.If the aggregate demand curve is AD1, which of the following is the most Appropriate discretionary fiscal policy to pursue?

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion.Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion.This contractionary action

Suppose a country increases government purchases by $700 billion.Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion.This policy action shifts the aggregate demand curve to the right by

Suppose a country institutes an investment tax credit and that leads to an increase in investment spending of $100 billion.Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion.This action is

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Consider two fiscal policy actions. I.a $400 billion reduction in income taxes II.a $400 billion increase in government purchases Which policy will have a bigger impact on aggregate demand?

A change in government purchases shifts the aggregate demand curve by an amount equal to the

Figure 12-3 -Refer to Figure 12-3.Suppose the aggregate demand curve is AD1. All of the following events Would bring the economy back to the natural rate of unemployment except

Suppose that when income taxes are reduced by $400 billion, households increase consumption By 80% of the resulting change in disposable income.Suppose also that the multiplier is 2.At a given price level, the aggregate demand curve shifts to the right by

The immediate impact of instituting investment tax credits is

An increase in government transfer payments will shift the aggregate demand curve to the right

Figure 12-2 -Refer to Figure 12-2.If discretionary fiscal policy is used to eliminate the gap, policy actions Will

Suppose that income taxes are increased by $600 billion.If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

Figure 12-2 -Refer to Figure 12-2.Assume that the economy is initially at Yr.A nonintervention policy Would return the economy to its potential output by