Question 1

When interest rates increase in Canada,the value of the dollar is likely to

Accepted Answer

When interest rates increase in Canada, it attracts foreign investment, leading to an increase in demand for the Canadian dollar, thus increasing its value. Higher interest rates can also make borrowing more expensive, potentially reducing domestic consumption and investment in export industries, leading to a decline in net exports.

Question 2

Suppose the government lowered marginal tax rates from 50 percent to 30 percent.This would be an example of

Accepted Answer

Lowering marginal tax rates would increase disposable income, resulting in an increase in consumer spending and overall economic activity, making it an expansionary fiscal policy.

Question 3

If the economy is below its full-employment level of real national income,a supply-side economist would argue the appropriate policy is

Accepted Answer

A supply-side economist would argue that the appropriate policy is to lower marginal tax rates, which would increase incentives to work, save, and invest, leading to higher economic growth and ultimately increasing real national income. This approach is based on the belief that lower taxes lead to increased investment and production, which in turn leads to higher economic growth, job creation, and ultimately increased government revenue. Expansionary fiscal policy of increasing government spending may not address the structural issues in the economy and may lead to inflationary pressures. Lowering marginal tax rates on people and raising them on corporations may discourage investment and hinder economic growth. Leaving the economy alone may not address the underutilization of resources and may lead to long-term economic stagnation.

Question 4

Figure 11-2 
-In Figure 11-2,if the government increases government spending to shift aggregate demand from A D₁ to A D₂,but aggregate demand only increases to AD₃,then it is likely that

Accepted Answer

The answer of Figure 11-2 
-In Figure 11-2,if the government...

Question 5

When private expenditures decrease as a result of increased government spending,it is known as

Accepted Answer

The described scenario where private expenditures decrease due to increased government spending is known as the crowding out effect. This occurs because the increased government spending leads to higher interest rates, thus reducing private investment and consumption. The stabilizer effect refers to the automatic stabilizing effect of government spending during economic fluctuations. The multiplier effect describes how an initial increase in spending can have a larger impact on the overall economy through successive rounds of spending. Government deficit spending refers to the situation where government spending exceeds government revenues, leading to a budget deficit.

Question 6

A recent government proposal to increase marginal taxes on those making over $200,000 a year will generate $100 billion in new tax revenues.A supply-side economist would argue that the actual revenue raised will be

Accepted Answer

According to supply-side economics, higher taxes create a disincentive for individuals to work and invest, leading to a decrease in economic activity. Therefore, it is likely that some individuals making over $200,000 a year may choose to work less or find ways to reduce their taxable income, resulting in less than $100 billion in new tax revenues.

Question 7

The possibility of indirect crowding out suggests that,if the government wants to engage in expansionary policy,it must

Accepted Answer

Indirect crowding out implies that government spending leads to higher interest rates, which in turn reduces investment. To counteract this and still achieve the desired expansionary effect, the government would need to increase spending more than what the simple Keynesian model suggests, to offset the reduction in private investment.

Question 8

The crowding out effect is usually associated with

Accepted Answer

The crowding out effect occurs when government borrowing increases, leading to an increase in the rate of interest. This increase in the interest rate can lead to a decrease in private sector borrowing, thereby crowding out private investment. This effect is associated with fiscal policy, particularly expansionary fiscal policy where the government increases its spending or reduces taxes.

Question 9

Suppose the government increased marginal tax rates from 30 percent to 50 percent.This would be an example of

Accepted Answer

An increase in marginal tax rates would lead to a decrease in disposable income and spending, which is a contractionary fiscal policy aimed at reducing aggregate demand and curbing inflation.

Question 10

According to supply-side economists,lower marginal tax rates will not necessarily lead to lower tax revenues because

Accepted Answer

According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because the lower marginal tax rates will be applied to a growing tax base due to economic growth. As the economy grows, more individuals and businesses will enter the tax base, leading to an increase in tax revenues even with lower tax rates. This concept is known as the Laffer Curve, which illustrates the relationship between tax rates and tax revenues. At very high tax rates, a decrease in tax rates will lead to an increase in tax revenues, while at very low tax rates, an increase in tax rates will lead to an increase in tax revenues.

Question 11

According to the new classical economists,increases in government spending unaccompanied by tax increases will not necessarily increase aggregate demand because

Accepted Answer

According to new classical economists, consumers will anticipate future tax increases to cover the increased government spending and, therefore, will consume less and save more to prepare for these expected taxes. This offsets any potential increase in aggregate demand.

Question 12

When interest rates decrease in Canada,the value of the dollar is likely to

Accepted Answer

When interest rates decrease, foreign investors are less attracted to Canadian bonds and short-term securities, causing a decrease in the demand for Canadian dollars, resulting in a decrease in the value of the dollar. A lower value of the Canadian dollar makes Canadian exports cheaper and more competitive in foreign markets, which leads to an increase in net exports.

Question 13

If increased government spending has no effect on either the level of real national income or the price level,we know that

Accepted Answer

Complete crowding out implies that increased government spending is offset by a decrease in private sector spending, resulting in no change in real national income or price level.

Question 14

Supply side economics refers to

Accepted Answer

Supply side economics is focused on creating incentives that will encourage increased productivity and output. This can include policies such as tax cuts, deregulation, and subsidies to businesses. The idea is that by increasing the supply of goods and services, economic growth will be stimulated, leading to increased employment and ultimately increased aggregate demand.

Question 15

If government spending is increased without a raise in taxes,net exports will eventually decrease due to a rise in interest rates.This phenomenon is known as the

Accepted Answer

When government spending increases without a corresponding increase in taxes, it creates a budget deficit. In order to finance the deficit, the government may choose to borrow from the domestic market. This increases the demand for loanable funds and, as a result, interest rates rise. This makes domestic assets more attractive to foreign investors, leading to an increase in the value of the domestic currency. As a result, exports become more expensive and thus net exports will eventually decrease. This phenomenon is known as the net export effect.

Question 16

The crowding-out effect refers to the tendency of expansionary fiscal policy to

Accepted Answer

Expansionary fiscal policy, such as increased government spending or tax cuts, can lead to increased demand for goods and services. This can potentially cause businesses to increase their prices and reduce investment or consumption in the private sector due to competition for resources. This is known as the crowding-out effect.

Question 17

The Ricardian equivalence theorem states that

Accepted Answer

The Ricardian equivalence theorem states that an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. This is because individuals anticipate that the government will have to raise taxes in the future to pay off the deficit, so they save the tax cut instead of spending it. As a result, there is no increase in aggregate demand, and real national income remains unchanged.

Question 18

Lower marginal tax rates can increase total tax revenues is a tenet of

Accepted Answer

This is a key argument of supply-side economics, which posits that lower marginal tax rates can incentivize individuals and businesses to work and invest more, thus growing the economy and ultimately leading to higher tax revenues.

Question 19

Figure 11-2 
-Assume the economy was at E in Figure 11-2 and the government increased spending.If the aggregate demand curve initially shifted to A D₂,but then fell back to AD₃,then we know that

Accepted Answer

When the aggregate demand curve initially shifts to AD₂, it indicates that the government's increase in spending has stimulated the economy, causing an increase in planned private investment spending. However, when the aggregate demand falls back to AD₃, it implies that there has been crowding out of planned private investment spending. This is because, as aggregate demand shifts to the right due to increased government spending, interest rates rise, making it more expensive for firms to borrow money for investment. Consequently, some firms may be discouraged from investing, leading to a decrease in planned private investment spending, and causing the aggregate demand to fall back to AD₃. Therefore, the correct answer is C.

Question 20

One part of the supply-side economics argument is that

Accepted Answer

Supply-side economists argue that lowering marginal tax rates can incentivize individuals and businesses to work harder and invest more, ultimately leading to increased economic growth and higher tax revenues overall. While the idea that the relevant aggregate supply curve is close to horizontal is associated with supply-side economics, it is not directly related to the argument about tax rates. The choice of a 50 percent marginal tax rate is not a central tenet of the theory, but rather a specific policy recommendation that some supply-siders may support.

Quiz 11: Fiscal Policy and the Public Debt