Question 1

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 0.8 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 lower,but the price level would be higher.
D) Real GDP would be lower,but the price level would be the same.

Accepted Answer

The increase in business costs would shift the long-run aggregate supply curve to the left, leading to a decrease in real GDP in the long run. The increase in government purchases would shift the aggregate demand curve to the right, leading to an increase in both the price level and real GDP in the short run. However, the crowding-out effect of $70 billion would decrease the output of the economy by reducing private investment. As a result, in the long run, real GDP would be lower than the initial long-run equilibrium level, but the price level would be higher due to the increase in government spending.

Question 2

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 0.9,by how much do government purchases have to rise?
A) $10 billion
B) $20 billion
C) $50 billion
D) $100 billion

Accepted Answer

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

Question 3

What do supply-side economists believe a reduction in the tax rate will cause?
A) a large shift of the aggregate-supply curve to the left
B) a large shift of the aggregate-supply curve to the right
C) a small shift of the aggregate-supply curve to the right
D) a small shift of the aggregate-supply curve to the left

Accepted Answer

Supply-side economists believe that a reduction in tax rates will provide incentives for businesses and individuals to work harder, invest more, and innovate, leading to an increase in aggregate supply. This means a shift of the aggregate-supply curve to the right.

Question 4

Which statement is consistent with the supply-side theories?
A) The Bank of Canada should use monetary policy only to control the rate of inflation.
B) The government should promote full employment and production.
C) The government should periodically increase the minimum wage and unemployment insurance benefits.
D) Tax cuts influence the aggregate supply significantly.

Accepted Answer

Supply-side theories argue that tax cuts can stimulate economic growth by increasing the incentives for individuals and businesses to produce goods and services. This aligns with statement D, which implies that tax policy can have a significant impact on the aggregate supply of the economy. Statements A, B, and C are not consistent with supply-side theories, as they focus either on monetary policy or government intervention to promote full employment and social welfare.

Question 5

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 due to immigration will shift the long-run aggregate supply curve to the right, resulting in an increase in real GDP in the long run. The government purchases will increase aggregate demand, leading to an increase in the price level. However, the crowding-out effect of $160 billion will cause a reduction in private investment, which means the increase in government purchases is partially offset. 
The increase in aggregate supply due to the shift in the long-run aggregate supply curve will be greater than the increase in aggregate demand due to the government purchases, leading to an increase in real GDP and a decrease in the price level. Therefore, the correct answer is C.

Question 6

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 federal budget, it could lead to a decrease in aggregate demand which may result in unemployment and recession. To counter this effect, the Bank of Canada can increase the money supply by buying government securities or lowering the interest rates. This would stimulate aggregate demand, encourage borrowing and spending, and ultimately stabilize the economy without affecting the balanced budget.

Question 7

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

Accepted Answer

The crowding-out effect tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise. This effect occurs because when the government lowers taxes, it often needs to borrow money to finance its spending, which leads to an increase in interest rates. Higher interest rates discourage private investment and consumption, offsetting some of the initial boost to aggregate demand from the tax cut. The multiplier effect tends to amplify the initial shift in aggregate demand, while the catch-up effect and Fisher effect are not directly related to tax changes.

Question 8

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 9

What effects do supply-side economists believe that lowering taxes have?
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 lowering taxes will incentivize individuals to work harder and businesses to invest more, leading to an increase in aggregate supply. Moreover, if individuals and businesses have more disposable income due to tax cuts, they will spend more, which will increase aggregate demand. Therefore, supply-side economists argue that lowering taxes will lead to an increase in both aggregate demand and supply.

Question 10

Suppose the closed economy is in long-run equilibrium.Advances in technology shift the long-run aggregate-supply curve $80 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 0.75,by how much must the government cut its spending?
A) $4 billion
B) $40 billion
C) $75 billion
D) $150 billion

Accepted Answer

First, we need to find the initial equilibrium level of output (Y) and the price level (P). Since the economy was in long-run equilibrium, there was no output gap and prices were stable.

When the long-run aggregate supply (LRAS) curve shifts right by $80 billion, the new equilibrium output level is determined by the intersection of AD and the new LRAS curve. This means that output increased by $80 billion.

Similarly, when the aggregate demand (AD) curve shifts right by $150 billion, the new equilibrium output level is determined by the intersection of the new AD curve and the original LRAS curve. This means that output increased by $150 billion.

We want to stabilize the price level at its original value, which means that we need to return output to its initial level. In other words, we need to decrease output by $80 billion.

The government can achieve this by reducing its spending. We need to find the amount of government spending cut that will decrease output by $80 billion. We know that the multiplier effect is 1/1-MPC and that the crowding-out effect is half of the multiplier effect. Therefore, we have:

Multiplier effect = 1/1-0.75 = 4

Crowding-out effect = 0.5 * 4 = 2

The decrease in output that results from a decrease in government spending is given by:

ΔY = - (Crowding-out effect) * ΔG

ΔY = - 2 * ΔG

We want ΔY = -$80 billion, so we can solve for ΔG:

-$80 billion = -2 * ΔG

ΔG = $40 billion

Therefore, the government must cut its spending by $40 billion to return output to its initial level and stabilize the price level.

Question 11

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

When households view a tax cut as being temporary, they are less likely to significantly increase their spending and consumption since they know their post-tax incomes will eventually decrease. Therefore, the tax cut has a weaker effect on aggregate demand compared to if households view the cut as permanent.

Question 12

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 long-term increase in disposable income and consumer spending, leading to a larger shift to the right of the AD curve compared to temporary tax cuts which have a smaller impact on disposable income and spending.

Question 13

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 more on how fiscal policy affects aggregate supply, which refers to the total amount of goods and services that businesses in an economy are willing and able to produce. They believe that policies aimed at increasing incentives for businesses (such as lower taxes and less regulation) will lead to increased production, employment, and overall 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 are willing and able to buy.

Question 14

What 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 infrastructure would lead to more investment in physical capital, which would increase the economy's productive capacity in the long run. This would shift the long-run aggregate-supply curve to the right. In the short run, there may be some inflationary pressure as business demand for raw materials and labor increases, which could shift the short-run aggregate-supply curve to the left. However, over the long run, the increased investment in infrastructure would lead to greater productivity and economic growth. Thus, D is the best choice.

Question 15

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 0.75 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 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 shift in the long-run aggregate supply will increase potential output, shifting the short-run aggregate supply curve to the right. With an increase in government purchases, aggregate demand will also shift to the right. The crowding-out effect reduces the net increase in aggregate demand by $70 billion. However, with an MPC of 0.75, the multiplier effect will still increase aggregate demand and real GDP. The increase in potential output combined with the increase in aggregate demand will lead to an increase in both real GDP and the price level.

Question 16

Which statement is consistent with the supply-side theories?
A) When there is a recession,the Bank of Canada should decrease the money supply.
B) A shift in aggregate supply leads to a permanent increase in the natural rate of output.
C) The government should periodically increase the minimum wage and unemployment insurance benefits.
D) Aggregate demand does not shift in the short run.

Accepted Answer

This statement is consistent with the supply-side theory as it suggests that changes in the aggregate supply will have a long-term impact on the economy, leading to a permanent increase in the natural rate of output. Supply-side theorists believe that policies aimed at increasing the productive capacity of the economy, such as tax cuts and deregulation, will lead to sustained economic growth.

Question 17

According to most economists,what will a cut in tax rates do?
A) increase government tax revenue
B) decrease significantly the hours people work
C) have a smaller effect on the aggregate-supply curve than what supply-side economists believe
D) increase tax revenue by increasing worker effort

Accepted Answer

The answer of According to most economists,what will a cut...

Question 18

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 0.8 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 19

According to supply-side theories,what 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

According to supply-side theories, a tax rate cut means workers keep more of each additional dollar they earn. This increases their incentive to work, leading to an increase in work effort, which in turn leads to an increase in aggregate supply. Therefore, aggregate supply shifts right. Choice C is the correct answer.

Question 20

According to most economists,what does fiscal policy affect?
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 is the use of government spending and taxation to influence the economy. It is designed to affect aggregate demand, which is the total demand for goods and services in an economy. When the government increases spending or reduces taxes, it boosts aggregate demand, leading to higher employment and output. Conversely, when the government cuts spending or raises taxes, it contracts aggregate demand, leading to lower employment and output. While fiscal policy can indirectly affect aggregate supply by influencing incentives for work and investment, it is primarily focused on aggregate demand management.

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

What do supply-side economists believe a reduction in the tax rate will cause?

Which statement is consistent with the supply-side theories?

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?

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

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?

What effects do supply-side economists believe that lowering taxes have?

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

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

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

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

Which statement is consistent with the supply-side theories?

According to most economists,what will a cut in tax rates do?

According to supply-side theories,what happens if the government cuts the tax rate?

According to most economists,what does fiscal policy affect?