Question 1

What do supply-side economists focus more on than other economists?
A)how fiscal policy affects consumption
B)the multiplier effect of fiscal policy
C)how fiscal policy affects aggregate supply
D)the accelerator and exchange-rate effects

Accepted Answer

Supply-side economists focus on how fiscal policy affects aggregate supply, which refers to the total amount of goods and services that an economy can produce. They believe that policies like tax cuts and deregulation can increase incentives for businesses to invest and expand, which can lead to higher levels of aggregate supply and economic growth. This is in contrast to demand-side economists, who focus more on how fiscal policy affects aggregate demand, or the total amount of goods and services that consumers and businesses are willing to buy.

Question 2

Suppose the closed economy is in long-run equilibrium.Technological change shifts the long-run aggregate-supply curve $80 billion to the right.At the same time,government purchases increase by $40 billion.If the MPC equals 0.8 and the crowding-out effect is $70 billion,what would we expect to happen in the long-run to real GDP and the price level?
A)Both real GDP and the price level would be higher.
B)Both real GDP and the price level would be lower.
C)Real GDP would be higher but the price level would be lower.
D)Real GDP would be higher but the price level would be the same.

Accepted Answer

The answer of Suppose the closed economy is in long-run...

Question 3

How do permanent tax cuts shift the AD curve compared with temporary tax results?
A)Permanent tax cuts shift the AD curve farther to the right than temporary tax cuts do.
B)Permanent tax cuts shift the AD curve less to the right than temporary tax cuts do.
C)Permanent tax cuts shift the AD curve farther to the left than temporary tax cuts do.
D)Permanent tax cuts shift the AD curve less to the left than temporary tax cuts do.

Accepted Answer

Permanent tax cuts provide a more predictable and longer-lasting increase in disposable income, leading to a larger increase in consumption and a bigger shift in the AD curve. Temporary tax cuts, on the other hand, provide a short-term boost to disposable income and consumption, resulting in a smaller shift in the AD curve.

Question 4

If households view a tax cut as being temporary,how does the tax cut affect aggregate demand?
A)It has no effect on aggregate demand.
B)It has a stronger effect on aggregate demand than if households view the cut as permanent.
C)It has the same effect on aggregate demand than if households view the cut as permanent.
D)It has a weaker effect on aggregate demand than if households view the cut as permanent.

Accepted Answer

If households view a tax cut as being temporary, they may choose to save the extra income rather than spend it since they expect their tax burden to increase again in the future. This would result in a weaker effect on aggregate demand compared to if households view the tax cut as permanent and thus have more confidence in spending their extra income.

Question 5

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?
A)by increasing the money supply
B)by decreasing the money supply
C)by raising taxes
D)by cutting expenditures

Accepted Answer

If the federal government cuts spending to balance the budget, it could lead to decreased aggregate demand, which could result in unemployment and recession. To prevent this, the Bank of Canada could increase the money supply through measures such as lowering interest rates or engaging in quantitative easing. This would stimulate borrowing, investment, and spending, thereby offsetting the contractionary effect of lower government spending. Raising taxes or cutting expenditures could further reduce aggregate demand and worsen the economic situation.

Question 6

According to supply-side theories,which of the following happens if the government cuts the tax rate?
A)Workers keep less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)Workers keep less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)Workers keep more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)Workers keep more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Accepted Answer

Supply-side theories argue that cutting taxes can increase the incentive for individuals to work and invest, leading to an increase in aggregate supply. When the tax rate is cut, workers keep more of each additional dollar they earn, which can increase work effort and productivity. This results in a rightward shift in the aggregate supply curve.

Question 7

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure,which will lower shipping costs for many businesses.What might we expect in the short run and the long run to happen to real GDP and the price level?
A)Real GDP will increase and the price level will fall, but in the long run, there will be no effect.
B)Real GDP will increase and the price level will fall, but in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
C)Real GDP will increase and the price level might rise, fall, or stay the same, and in the long run, real GDP will increase and the price level might rise, fall, or stay the same.
D)Real GDP will increase and the price level might rise, fall, or stay the same, but in the long run, the price level will increase and real GDP might rise, fall or stay the same.

Accepted Answer

The answer of The economy is in long-run equilibrium when...

Question 8

Most economists believe that fiscal policy affects which of the following?
A)only aggregate demand and not aggregate supply
B)mostly aggregate demand
C)mostly aggregate supply
D)only aggregate supply and not aggregate demand

Accepted Answer

Fiscal policy primarily affects aggregate demand, which is the total demand for goods and services in the economy. By increasing government spending or cutting taxes, fiscal policy can stimulate consumer spending and investment, increasing aggregate demand. Conversely, by decreasing government spending or raising taxes, fiscal policy can slow down spending and decrease aggregate demand. Fiscal policy can also have some impact on aggregate supply by affecting factors such as labor force participation rates or investment incentives, but its primary impact is on aggregate demand.

Question 9

Suppose the closed economy is in long-run equilibrium.Immigration of skilled workers shifts the long-run aggregate-supply curve $120 billion to the right.At the same time,government purchases increase by $50 billion.If the MPC equals 0.75 and the crowding-out effect is $80 billion,what would we expect to happen in the long run to real GDP and the price level?
A)Both real GDP and the price level would be higher.
B)Both real GDP and the price level would be lower.
C)Real GDP would be higher, but the price level would be lower.
D)Real GDP would be higher, but the price level would be the same.

Accepted Answer

The answer of Suppose the closed economy is in long-run...

Question 10

Which of the following is the most likely effect of an increase in government spending on goods to build or repair infrastructure?
A)It would shift the aggregate-demand curve to the left.
B)It would shift the long-run aggregate-supply curve to the left. .
C)It would shift the short-run aggregate-supply curve to the left.
D)It would shift the long run aggregate-supply curve to the right.

Accepted Answer

An increase in government spending on goods to build or repair infrastructure would lead to an increase in investment, which would increase the economy's long-run capacity. This, in turn, would lead to a shift in the long-run aggregate-supply curve to the right.

Question 11

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?
A)the multiplier effect
B)the crowding-out effect
C)the accelerator effect
D)the Fisher effect

Accepted Answer

The crowding-out effect occurs when an increase in government spending or a decrease in taxes causes interest rates to rise, which in turn reduces private investment spending. This reduction in private investment spending partially offsets the initial increase in aggregate demand, making the overall shift in aggregate demand smaller. Therefore, a tax change would result in a smaller shift in aggregate demand due to the crowding-out effect. The other options listed do not relate to the size of a shift in aggregate demand resulting from a tax change.

Question 12

When the government reduces taxes,all other things being equal,which of the following decrease?
A)consumption
B)take-home pay
C)household saving
D)government surplus

Accepted Answer

When the government reduces taxes, the government surplus decreases as they are collecting less revenue. A, B, and C are incorrect as they would typically increase as people have more disposable income and are more likely to consume, take home more pay, and save less. However, other factors such as interest rates and consumer confidence can also influence these variables.

Question 13

Suppose the closed economy is in long-run equilibrium.Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right.At the same time,government purchases increase by $40 billion.If the MPC equals 0.75 and the crowding-out effect is $160 billion,what would we expect to happen in the long-run to real GDP and the price level?
A)Both real GDP and the price level would be higher.
B)Both real GDP and the price level would be lower.
C)Real GDP would be higher, but the price level would be lower.
D)Real GDP would be higher, but the price level would be the same.

Accepted Answer

The increase in skilled workers would shift the long-run aggregate supply curve to the right, increasing potential GDP. Government purchases would increase aggregate demand. The MPC of 0.75 indicates that there would be some increase in consumption as a result of the increased government spending, further increasing aggregate demand. However, the crowding-out effect reduces the increase in aggregate demand by $160 billion. This means that the increase in aggregate demand is less than the increase in potential GDP, leading to an increase in real GDP and a decrease in the price level.

Question 14

Suppose the closed economy is in long-run equilibrium.Pessimism on the part of investors then shifts the aggregate-demand curve $50 billion to the left.The government wants to increase spending in order to avoid a recession.If the crowding-out effect is always half as strong as the multiplier effect,and if the MPC equals 0.8,by how much do government purchases have to rise?
A)$10 billion
B)$20 billion
C)$50 billion
D)$100 billion

Accepted Answer

In the short run, a leftward shift in the aggregate-demand curve causes a recession with lower output and higher unemployment. To avoid a recession, the government needs to increase aggregate demand by increasing its own spending, transfer payments, or cutting taxes. 
The government spending multiplier is: 1/(1-MPC) = 1/(1-0.8) = 5
If the crowding-out effect is half as strong as the multiplier effect, then the net multiplier is 5-0.5*5 = 2.5
To increase aggregate demand by $50 billion, the government needs to spend $50 billion/2.5 = $20 billion. 
Therefore, the correct answer is B) $20 billion.

Question 15

What are the effects of a change in taxes on consumption and aggregate demand?
A)If taxes increase, consumption increases and aggregate demand shifts right.
B)If taxes increase, consumption decreases and aggregate demand shifts left.
C)If taxes decrease, consumption increases and aggregate demand shifts left.
D)If taxes decrease, consumption decreases and aggregate demand shifts right.

Accepted Answer

When taxes increase, disposable income (money left after taxes) decreases. This results in a decrease in consumption, as people have less money to spend on goods and services. A decrease in consumption leads to a decrease in aggregate demand, as there is less demand for goods and services overall. Therefore, aggregate demand shifts left.

Question 16

Supply-side economists believe that lowering taxes has what effects?
A)It lowers aggregate demand and increases aggregate supply.
B)It lowers both aggregate demand and aggregate supply.
C)It increases both aggregate demand and aggregate supply.
D)It increases aggregate demand and decreases aggregate supply.

Accepted Answer

Supply-side economists believe that lower taxes will incentivize individuals and businesses to work, invest, and innovate more, thereby increasing aggregate supply. Additionally, if individuals and businesses have more disposable income due to lower taxes, they will be able to increase their consumption, which will increase aggregate demand. Therefore, lowering taxes is believed to increase both aggregate demand and aggregate supply.

Question 17

Supply-side economists believe that a reduction in the tax rate will do which of the following?
A)decrease government tax revenue
B)shift the aggregate-supply curve to the right
C)provide no incentive for people to work more
D)decrease consumption

Accepted Answer

According to supply-side economists, reducing tax rates can incentivize individuals and businesses to work harder and invest more, which can ultimately increase the productive capacity of the economy and shift the aggregate supply curve to the right. While this may initially result in a decrease in government tax revenue, the argument is that the long-term benefits to the economy will outweigh this short-term cost. This view is often contrasted with demand-side economics, which emphasizes the importance of stimulating consumer spending to promote economic growth.

Question 18

Suppose the economy is in long-run equilibrium.Parliament passes regulations that make it more costly to conduct business,so the long-run aggregate-supply curve shifts $80 billion to the left.At the same time,government purchases increase by $60 billion.If the MPC equals 0.75 and the crowding-out effect is $70 billion,what would we expect to happen in the long run to real GDP and the price level?
A)Both real GDP and the price level would be higher.
B)Both real GDP and the price level would be lower.
C)Real GDP would be lower, but the price level would be higher.
D)Real GDP would be lower, but the price level would be the same.

Accepted Answer

Once regulations are passed making it more costly to conduct business, the long-run aggregate-supply curve shifts to the left by $80 billion. However, government purchases will increase by $60 billion. The net effect of these is a $20 billion decrease in the economy's GDP.

The crowding-out effect occurs when increased government spending leads to a decrease in private investment. In this case, the crowding-out effect is $70 billion. This means that the increase in government purchases of $60 billion leads to a decrease in private investment of $70 billion, resulting in a net decrease of $10 billion.

Given an MPC of 0.75, this means that any change in government spending will have a 4 times larger effect on GDP. So, the net effect of the increase in government purchases and the crowding-out effect is a net decrease in GDP of $40 billion.

Therefore, real GDP would be lower, but the price level would be higher.

Question 19

Most economists believe that a cut in tax rates will do which of the following?
A)increase government tax revenue
B)decrease significantly the hours people work
C)have a relatively small effect on the aggregate-supply curve
D)have a significant effect on the aggregate-supply curve

Accepted Answer

Most economists believe that a cut in tax rates will have a relatively small effect on the aggregate-supply curve, as it may increase consumer spending and aggregate demand, but it may also lead to a decrease in government revenue and potentially lead to higher inflation. It is unlikely to have a significant effect on the aggregate-supply curve itself.

Question 20

Suppose the closed economy is in long-run equilibrium.Advances in technology shift the long-run aggregate-supply curve $75 billion to the right.Optimistic investors have shifted the aggregate-demand curve $150 billion to the right.In order to stabilize the price level at its original value,the government wants to reduce its spending.If the crowding-out effect is always half of the multiplier effect,and if the MPC equals 0.8,by how much must the government cut its spending?
A)$4 billion
B)$30 billion
C)$75 billion
D)$150 billion

Accepted Answer

Since the long-run aggregate supply curve shifts to the right by $75 billion and the aggregate demand curve shifts to the right by $150 billion, there will be an excess demand of $75 billion at the original price level. To stabilize the price level at its original value, the government needs to reduce aggregate demand by $75 billion. Since the MPC is 0.8, the multiplier is 1/ (1 - MPC) = 5. Therefore, the government needs to reduce spending by $75 billion / 5 = $15 billion. However, since the crowding-out effect is always half of the multiplier effect, the actual reduction in aggregate demand due to the government spending cut will be $15 billion / 2 = $7.5 billion. Therefore, the government needs to reduce spending by $30 billion to stabilize the price level at its original value.

Quiz 15: The Influence of Monetary and Fiscal Policy on Aggregate Demand

What do supply-side economists focus more on than other economists?

How do permanent tax cuts shift the AD curve compared with temporary tax results?

If households view a tax cut as being temporary,how does the tax cut affect aggregate demand?

If the federal government cuts spending to balance the federal budget,how can the Bank of Canada act to prevent unemployment and recession while maintaining the balanced budget?

According to supply-side theories,which of the following happens if the government cuts the tax rate?

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure,which will lower shipping costs for many businesses.What might we expect in the short run and the long run to happen to real GDP and the price level?

Most economists believe that fiscal policy affects which of the following?

Which of the following is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

When the government reduces taxes,all other things being equal,which of the following decrease?

What are the effects of a change in taxes on consumption and aggregate demand?

Supply-side economists believe that lowering taxes has what effects?

Supply-side economists believe that a reduction in the tax rate will do which of the following?

Most economists believe that a cut in tax rates will do which of the following?