Question 1

If Congress wanted to counteract the effects of a recession it could

Accepted Answer

Increasing government purchases would increase demand for goods and services, which can stimulate economic growth and counteract the effects of a recession. Increasing tax rates or taxes by a fixed amount would decrease disposable income and potentially decrease consumer spending, which could worsen the effects of a recession. Decreasing defense spending would likely result in job losses in the defense sector and have a negative impact on economic growth.

Question 2

The multiplier effect is the series of ________ increases in ________ expenditures that result from an initial increase in ________ expenditures.

Accepted Answer

The multiplier effect refers to the induced increase in consumption expenditures that result from an initial increase in autonomous expenditures. Autonomous expenditures can refer to any initial increase in spending, including investment expenditures, but in the context of the multiplier effect, the induced spending increases are due to changes in consumption expenditures. Therefore, choice B is the best answer.

Question 3

The tax multiplier

Accepted Answer

The tax multiplier is negative, meaning that a decrease in taxes will lead to an increase in aggregate demand and therefore an increase in output and income.

Question 4

An equal increase in government purchases and taxes will cause

Accepted Answer

An equal increase in government purchases and taxes leads to an increase in real GDP because the government spending multiplier is larger than the tax multiplier. This means that while both increase, the effect of increased government spending on GDP is stronger, leading to an overall increase in real GDP.

Question 5

Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to increase government purchases by

Accepted Answer

To restore the economy to potential real GDP, fiscal policy needs to increase aggregate demand. The formula for calculating the change in real GDP resulting from a change in government purchases is:
Change in Real GDP = Multiplier x Change in Government Purchases
Assuming a multiplier of 1.5 (a common estimate), Congress would need to increase government purchases by:
Change in Government Purchases = (Change in Real GDP) / Multiplier
Change in Government Purchases = ($13.5 trillion - $13 trillion) / 1.5
Change in Government Purchases = $333 billion
Therefore, Congress and the president would need to increase government purchases by less than $500 billion.

Question 6

Figure 18-12
 
-Refer to Figure 18-12.An increase in government purchases causes aggregate demand to shift ultimately from AD₁ to AD₂.In the new equilibrium at point B,both real GDP and the price level have increased.The increase in real GDP is ________ than that indicated by the multiplier effect with a constant price level.

Accepted Answer

The question states that both real GDP and the price level have increased in the new equilibrium at point B, which indicates that there has been some inflationary pressure. This suggests that there has been some crowding out of private investment due to higher interest rates, which would reduce the multiplier effect and result in a smaller increase in real GDP than would be expected with a constant price level. Therefore, the correct answer is B) less than.

Question 7

Suppose real GDP is $12.1 trillion and potential GDP is $12.6 trillion.To move the economy back to potential GDP,Congress should

Accepted Answer

The answer of Suppose real GDP is $12.1 trillion and...

Question 8

Suppose real GDP is $14 trillion and potential real GDP is $14.4 trillion.An increase in government purchases of $400 billion would cause real GDP to ________ potential real GDP (assuming a constant price level).

Accepted Answer

An increase in government purchases of $400 billion would stimulate economic activity and increase real GDP. However, if potential GDP remains constant, the increase in real GDP would cause the economy to operate above its potential level, resulting in inflationary pressures. Therefore, real GDP would be more than potential GDP.

Question 9

A change in tax rates

Accepted Answer

The answer of A change in tax rates
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Question 10

If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.

Accepted Answer

If the government increases taxes by the same amount it increases government spending, there will still be a decrease in aggregate demand. This is because the decrease in consumption spending by households will not offset the entire increase in government spending. Additionally, there may be other factors that could affect consumption spending, such as changes in consumer confidence or interest rates.

Question 11

Cutting taxes

Accepted Answer

Cutting taxes means people will have more disposable income, which will increase their ability to spend. Therefore, cutting taxes will raise disposable income and raise spending.

Question 12

If the absolute value of the tax multiplier equals 1.6,real GDP is $13 trillion,and potential real GDP is $13.4 trillion,then taxes would need to be cut by ________ to restore the economy to potential real GDP.

Accepted Answer

The tax multiplier effect indicates how much GDP changes in response to a change in taxes. With an absolute value of the tax multiplier of 1.6, a $1 change in taxes leads to a $1.6 change in GDP. To close a $0.4 trillion (or $400 billion) GDP gap, taxes need to be cut by the amount that, when multiplied by 1.6, equals $400 billion. Therefore, $400 billion / 1.6 = $250 billion.

Question 13

Suppose real GDP is $13 trillion,potential real GDP is $13.5 trillion,and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level,Congress and the president would need to decrease taxes by

Accepted Answer

To restore the economy to potential real GDP, Congress and the president would need to increase aggregate demand. One way to do this would be to decrease taxes, which would increase disposable income and therefore increase consumer spending. The size of the tax cut needed can be determined by subtracting potential real GDP from current real GDP: 
$13.5 trillion (potential real GDP) - $13 trillion (current real GDP) = $0.5 trillion or $500 billion. Therefore, the answer is B, less than $500 billion.

Question 14

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by

Accepted Answer

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by more than $200 billion due to the multiplier effect, where initial government spending leads to increased income and consumption, further amplifying the initial impact on aggregate demand.

Question 15

In absolute value,the tax multiplier is greater than the government purchases multiplier.

Accepted Answer

The government purchases multiplier is typically larger in absolute value than the tax multiplier because every dollar of government spending directly increases aggregate demand by the full amount, while tax cuts indirectly affect aggregate demand through the increase in household disposable income, part of which may be saved rather than spent.

Question 16

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.

Accepted Answer

The multiplier effect is generated by induced increases in consumption expenditure as income rises, which in turn leads to further increases in production and income.

Question 17

The government purchases multiplier is defined as

Accepted Answer

The government purchases multiplier measures the change in equilibrium real GDP resulting from a change in government purchases, hence it is defined as the change in equilibrium real GDP divided by the change in government purchases.

Question 18

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending,and ________ the size of the multiplier effect.

Accepted Answer

A cut in tax rates increases disposable income and consumer spending, which in turn increases the size of the multiplier effect, leading to a larger impact on equilibrium real GDP.

Question 19

If the government purchases multiplier equals 2,and real GDP is $14 trillion with potential real GDP $14.5 trillion,then government purchases would need to increase by ________ to restore the economy to potential real GDP.

Accepted Answer

The formula for the government spending multiplier is:

Multiplier = 1 / (1 - Marginal Propensity to Consume)

Assuming a multiplier of 2, we can say that:

Multiplier = ∆Y / ∆G

where ∆Y is the change in real GDP and ∆G is the change in government spending.

Substituting the values given in the question, we get:

2 = (14.5 trillion - 14 trillion) / ∆G

Solving for ∆G, we get:

∆G = (14.5 trillion - 14 trillion) / 2

∆G = 0.25 trillion or $250 billion

Therefore, the government purchases would need to increase by $250 billion to restore the economy to its potential real GDP. The correct answer is D).

Question 20

The tax multiplier is calculated as "one minus the government purchases multiplier."

Accepted Answer

The tax multiplier is calculated as "minus the government purchases multiplier" (not one minus).

Quiz 18: Fiscal Policy