Question 1

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

Accepted Answer

A contractionary fiscal policy involves decreasing government spending and/or increasing taxes, which reduces aggregate demand. This will result in a leftward shift of the aggregate demand curve. Therefore, the correct choice is A.

Question 2

In an aggregate demand-aggregate supply diagram,equal decreases in government spending and taxes will:

Accepted Answer

Equal decreases in government spending and taxes will shift the AD curve to the left since both actions decrease aggregate demand in the economy. This results in a decrease in equilibrium GDP.

Question 3

A specific reduction in government spending will dampen demand-pull inflation by a greater amount,the:

Accepted Answer

The answer of A specific reduction in government spending will...

Question 4

Contractionary fiscal policy is so named because it:

Accepted Answer

Contractionary fiscal policy is designed to reduce aggregate demand, which can lead to inflationary pressures, thus achieving price stability. It usually involves cutting government spending, increasing taxes, or a combination of the two. It does not necessarily involve a contraction of the money supply or expressly aim to contract real GDP.

Question 5

Suppose that in an economy with an MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation.It could:

Accepted Answer

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

Question 6

You are given the following information about aggregate demand at the existing price level for an economy: (1)consumption = $500 billion; (2)investment = $50 billion; (3)government purchases = $100 billion;and (4)net export = $20 billion.If the full-employment level of GDP for this economy is $620 billion,then what combination of actions would be most consistent with the goal of achieving price level stability?

Accepted Answer

Since the economy is already at or close to full employment level, increasing government spending would likely cause inflationary pressures and lead to further price level instability. Therefore, decreasing government spending and increasing taxes would be the best combination of actions to reduce aggregate demand and achieve price level stability.

Question 7

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

Since the full-employment GDP is $200 billion and the current aggregate demand is only $170 billion ($100 billion consumption + $40 billion investment + $10 billion net exports + $20 billion government purchases), the economy is experiencing a recessionary gap. To close this gap and reach full employment, the government should increase spending to stimulate aggregate demand. Therefore, reducing tax rates and increasing government spending (Choice C) would be the best option in this scenario. This would increase disposable income and consumption, while also increasing government purchases, thereby closing the recessionary gap and returning the economy to full employment. Encouraging personal saving by increasing the interest rate on government bonds (Choice A) and discouraging private investment by increasing corporate income taxes (Choice D) would have the opposite effect and exacerbate the recessionary gap. Decreasing government expenditures (Choice B) would also worsen the situation by further reducing aggregate demand.

Question 8

A contractionary fiscal policy is shown as a:

Accepted Answer

A contractionary fiscal policy involves decreasing government spending, increasing taxes, or both, which leads to a decrease in disposable income and a decrease in consumer spending. This results in a decrease in aggregate demand, causing a leftward shift in the economy's aggregate demand curve.

Question 9

Which are contractionary fiscal policies?

Accepted Answer

Contractionary fiscal policies are government policies that decrease aggregate demand by decreasing government spending or increasing taxes. Option B fits this definition by increasing taxation and decreasing government spending.

Question 10

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 increase disposable income and therefore increase consumption expenditure, which would shift the aggregate demand curve to the right. This would in turn lead to an increase in output and employment, which would help stabilize the economy. Therefore, within the framework of activist fiscal policy, cutting personal income taxes is primarily seen as a demand-side policy that would shift the aggregate demand curve to the right.

Question 11

In an economy,the government wants to decrease aggregate demand by $24 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPC is .75,then it could increase taxes by:

Accepted Answer

The government can decrease aggregate demand by decreasing government spending or increasing taxes. Here, since the government wants to decrease aggregate demand by $24 billion, increasing taxes is a viable solution.

To find the amount of tax increase, we can use the formula:
Change in GDP = -MPC x Change in Taxes

We know that the change in GDP is -$24 billion and the MPC is 0.75.

Substituting the values, we get:
-$24 billion = -0.75 x Change in Taxes

Solving for Change in Taxes, we get:
Change in Taxes = -$24 billion / (-0.75)
Change in Taxes = $32 billion

Therefore, the government could increase taxes by $32 billion to decrease aggregate demand by $24 billion. However, the question asks for the amount by which taxes should be increased, not the total amount. So the answer would be $8 billion, which is a reduction of aggregate demand by $24 billion ($8 billion x 0.75 = $24 billion).

Question 12

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

To achieve full employment, aggregate demand needs to be equal to or greater than the full-employment level of GDP. Currently, aggregate demand is at $555 billion ($400 billion + $40 billion + $90 billion + $25 billion), which is less than the full-employment level of GDP ($600 billion). The best combination of actions to increase aggregate demand and reach full employment would be to increase government spending and decrease taxes. This would increase both government purchases and disposable income for consumers, leading to an increase in consumption and investment.

Question 13

Which set of fiscal policies would tend to offset each other?

Accepted Answer

The answer of Which set of fiscal policies would tend...

Question 14

If the MPS in an economy is .4,government could shift the aggregate demand curve leftward by $50 billion at each price level by:

Accepted Answer

The government can shift the aggregate demand curve leftward by reducing government expenditures or increasing taxes. The formula to calculate the impact on aggregate demand is as follows:

ΔY = -ΔG/(1-MPC) = -ΔT * MPC/(1-MPC)

We can rearrange this formula to find the required reduction in government expenditures or increase in taxes:

ΔG = $50 billion * (1-0.4) = $30 billion

ΔT = $50 billion * 0.4/(1-0.4) = $20 billion

Therefore, reducing government expenditures by $30 billion or increasing taxes by $20 billion would shift the aggregate demand curve leftward by $50 billion at each price level. Out of the given choices, only option B reduces government expenditures by $20 billion, which is the best option.

Question 15

In an economy,the government wants to decrease aggregate demand by $48 billion at each price level to decrease real GDP and control demand-pull inflation.If the MPS is .25,then it could:

Accepted Answer

The MPC + MPS = 1, so if the MPS is 0.25, then the MPC is 0.75. The government wants to decrease aggregate demand by $48 billion, so we can use the formula:

Change in aggregate demand = -MPC x Change in disposable income

We can rearrange this formula to solve for the change in taxes, which is equal to the change in disposable income:

Change in taxes = -Change in aggregate demand / MPC

Plugging in the values, we get:

Change in taxes = -($48 billion) / 0.75 = -$64 billion

Since we want to decrease taxes, we need to reverse the sign to get a positive value:

Change in taxes = $64 billion

Since we want to decrease aggregate demand by $48 billion, we need to increase taxes by $48 billion. However, we calculated that we need to increase taxes by $64 billion, which is more than we need. Therefore, the best choice is to increase taxes by $16 billion, which is the closest to the desired target.

Question 16

Discretionary fiscal policy will stabilize the economy most when:

Accepted Answer

The answer of Discretionary fiscal policy will stabilize the economy...

Question 17

Countercyclical discretionary fiscal policy calls for:

Accepted Answer

Countercyclical discretionary fiscal policy involves intentionally using fiscal policy to offset economic fluctuations. During recessions, the government should increase spending or decrease taxes to stimulate demand and boost economic activity, which will result in budget deficits. Conversely, during periods of demand-pull inflation, the government should decrease spending or increase taxes to slow down demand and prevent inflationary pressures, resulting in budget surpluses. Therefore, the best choice is B, deficits during recessions and surpluses during periods of demand-pull inflation.

Question 18

Which combination of fiscal policy actions would most likely be offsetting?

Accepted Answer

Option A would be offsetting because the increase in taxes would decrease disposable income which would in turn decrease spending, whereas the increase in government spending would increase aggregate demand. Therefore, these two policies would work against each other, offsetting their effects on the economy.

Question 19

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 government needs to stimulate the economy by increasing aggregate demand. This can be done through increased government spending or decreased taxation, which both lead to more money in consumer's hands, resulting in increased spending and economic growth. A combination of the two actions could be even more effective. Decreased government spending or increased taxation could worsen the recession by reducing aggregate demand. Therefore, the best choice is increased government spending or decreased taxation, or a combination of the two actions.

Question 20

Which of the following represents the most contractionary fiscal policy?

Accepted Answer

The answer of Which of the following represents the most...

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