Question 1

Government policies intended to decrease planned spending and output are called ______ policies.
A)aggregate
B)monetary
C)fiscal
D)contractionary

Accepted Answer

The term "contractionary" specifically refers to policies aimed at reducing planned spending and output. This may involve measures such as increasing taxes, reducing government spending, or decreasing access to credit. Aggregate policy refers to general strategies for managing the economy as a whole, while monetary and fiscal policies can be either expansionary or contractionary depending on their specific goals.

Question 2

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.
A)structural
B)cyclical
C)productivity
D)stabilization

Accepted Answer

Stabilization policies aim to stabilize the economy by reducing output gaps through the use of government policy tools. These policies can include fiscal policies (government spending and taxation) and monetary policies (interest rates and money supply). Structural policies aim to address long-term economic issues such as enhancing productivity and competitiveness, while cyclical policies are used to manage fluctuations in output caused by business cycles.

Question 3

In the basic Keynesian model, an increase in government purchases:
A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.

Accepted Answer

In the basic Keynesian model, an increase in government purchases leads to an increase in aggregate demand, which shifts the aggregate expenditure curve upward. This leads to an increase in equilibrium output and a higher price level in the short run. Thus, option B is the correct answer.

Question 4

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap.
A)increase by 100
B)decrease by 100
C)increase by 1,000
D)decrease by 1,000

Accepted Answer

If the multiplier is 10, a 100-unit decrease in government purchases results in a 1,000-unit decrease in output. This closes the expansionary output gap of 1,000.

Question 5

Contractionary policies are government stabilization policies intended to decrease:
A)population.
B)unemployment.
C)average labor productivity.
D)planned spending.

Accepted Answer

Contractionary policies aim to reduce the amount of planned spending in the economy. This can be done through various means such as increasing taxes or reducing government spending. The goal is to decrease aggregate demand and slow down inflation.

Question 6

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $0.5 billion.
D)increased by $2 billion.

Accepted Answer

A $1 billion decrease in autonomous consumption shifts the PAE line downward. To shift it back to its original position, government purchases (another type of autonomous expenditures)must be increased by $1 billion.

Question 7

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by more than $1 billion.
D)increased by less than $1 billion.

Accepted Answer

Due to the income-expenditure multiplier, a short-run recessionary gap of $1 billion can be closed with new government purchases of less than $1 billion.

Question 8

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:
A)spending.
B)autonomous expenditure.
C)menu costs.
D)cyclical unemployment.

Accepted Answer

The income-expenditure multiplier works on the principle that one person's spending becomes another person's income. As those individuals earn additional income, they are likely to spend some of it, which becomes income for others, leading to a cycle of spending and income generation. Therefore, the multiplier effect results in additional spending.

Question 9

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)decreased by $0.5 billion.
D)decreased by $2 billion.

Accepted Answer

A $1 billion increase in autonomous consumption shifts the PAE curve upward. To shift it back down to its original position, government purchases (another type of autonomous expenditures)must be decreased by $1 billion.

Question 10

Expansionary policies are government stabilization policies intended to increase:
A)population.
B)unemployment.
C)average labor productivity.
D)planned spending.

Accepted Answer

Expansionary policies are designed to stimulate economic growth and activate planned spending in the economy. This is typically done through measures such as lowering interest rates, increasing government spending and reducing taxes. It is therefore aimed at increasing output and economic activity, rather than population or unemployment rates.

Question 11

In the basic Keynesian model, a decrease in government purchases:
A)reduces short-run equilibrium output.
B)increases short-run equilibrium output.
C)reduces potential output.
D)increases potential output.

Accepted Answer

In the basic Keynesian model, a decrease in government purchases leads to a decrease in aggregate demand, causing a leftward shift of the AD curve. This results in a decrease in short-run equilibrium output as firms reduce their production and employment levels to match the lower level of demand.

Question 12

Changes in taxes and transfers affect planned spending:
A)only when there is an expansionary gap.
B)autonomously.
C)directly, by changing induced expenditures.
D)indirectly, by changing disposable income and, consequently, consumption.

Accepted Answer

Changes in taxes and transfers affect disposable income, which in turn affects consumption. This is an indirect effect on planned spending, as it changes the amount that people plan to spend based on their available income.

Question 13

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.
A)a $5 billion increase
B)a greater than $5 billion decrease
C)no change.
D)a $5 billion decrease

Accepted Answer

Due to the income-expenditure multiplier, a $5 billion decrease in autonomous consumption results in a final decrease in output greater than $5 billion.

Question 14

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ______ to eliminate any output gap.
A)increase by 200
B)increase by 1,000
C)increase by 5,000
D)decrease by 200

Accepted Answer

If the multiplier is 5, a 200-unit increase in government purchases results in a 1,000-unit increase in output. This closes the recessionary output gap of 1,000.

Question 15

Government policies intended to increase planned spending and output are called ______ policies.
A)aggregate
B)monetary
C)fiscal
D)expansionary

Accepted Answer

Expansionary policies are government stabilization policies intended to increase planned spending and output.

Question 16

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $1.33 billion.
D)decreased by $1.33 billion.

Accepted Answer

To offset an expansionary gap of $1 billion, autonomous expenditures must decrease by $1 billion. An mpc of 0.75 means that households will reduce autonomous spending by only 75 percent of any increase in taxes (they will pay for the other 25 percent by saving less), so the increase in taxes that is needed is $1 billion/ 0.75 = $1.33 billion.

Question 17

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:
A)increased by $1 billion.
B)decreased by $1 billion.
C)increased by $1.33 billion.
D)decreased by $1.33 billion.

Accepted Answer

To offset a recessionary gap of $1 billion, autonomous expenditures must increase by $1 billion. An mpc of 0.75 means that households will spend only 75 percent of any reduction in taxes, so the reduction in taxes that is needed is $1 billion/ 0.75 = $1.33 billion.

Question 18

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:
A)increased by $10 billion.
B)decreased by $10 billion.
C)increased by more than $10 billion.
D)decreased by less than $10 billion.

Accepted Answer

Due to the income-expenditure multiplier, a short-run expansionary gap of $10 billion can be closed with decreased government purchases of less than $10 billion.

Question 19

Changes in government purchases affect planned spending:
A)only when there is an expansionary gap.
B)autonomously.
C)directly, by changing autonomous expenditures.
D)indirectly, by changing induced expenditures.

Accepted Answer

Changes in government purchases directly affect planned spending by changing autonomous expenditures. Induced expenditures are affected by changes in income or output, which in turn are affected by changes in government purchases. However, the direct impact of changes in government purchases on planned spending is through changes in autonomous expenditures. Therefore, option C is the best choice.

Question 20

Changes in government purchases affect planned spending _____, and changes in taxes and/or transfers affect planned spending _______.
A)directly; directly
B)directly; indirectly
C)directly; not at all
D)indirectly; indirectly

Accepted Answer

Changes in government purchases and taxes/transfer affect planned spending directly and indirectly, respectively. Government purchases directly impact the purchase of goods and services in the economy, which is a component of planned spending. On the other hand, changes in taxes and transfers indirectly affect planned spending by altering disposable income, which then affects consumption and saving decisions.

Quiz 11: Spending, Output, and Fiscal Policy

Government policies intended to decrease planned spending and output are called ______ policies.

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ______ policies.

In the basic Keynesian model, an increase in government purchases:

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap.

Contractionary policies are government stabilization policies intended to decrease:

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

In the short-run Keynesian model, to close a recessionary gap of $1 billion dollars government purchases must be:

The income-expenditure multiplier arises because one person's additional spending becomes another person's additional income that will generate additional:

In the short-run Keynesian model where the marginal propensity to consume is 0.5, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, government purchases must be:

Expansionary policies are government stabilization policies intended to increase:

In the basic Keynesian model, a decrease in government purchases:

Changes in taxes and transfers affect planned spending:

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output.

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ______ to eliminate any output gap.

Government policies intended to increase planned spending and output are called ______ policies.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, taxes must be:

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

Changes in government purchases affect planned spending:

Changes in government purchases affect planned spending _, and changes in taxes and/or transfers affect planned spending ___.