Question 1

If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8, it should decrease autonomous net taxes by

Accepted Answer

The spending multiplier formula is ΔY = (1/MPS) × ΔAutonomous Spending. Alternatively, ΔY = MPC × ΔAutonomous Spending can also be used.
Here, the question asks to increase equilibrium income by $100. So, ΔY = $100.
The MPC is given to be 0.8. Therefore, MPC = 4/5 and MPS = 1/5.
Substituting these values and rearranging the formula, we get:
ΔAutonomous Spending = ΔY/MPC = ($100)/(4/5) = $125
Since net taxes are decreasing, it means they are becoming more negative (assuming no other changes to government spending, transfer payments, or other factors affecting aggregate demand).
Therefore, the change in autonomous net taxes = -$125.
However, the question asks for the amount of decrease in autonomous net taxes. So, the answer would be the absolute value of the change, which is $125. But this is not given in the answer choices. Out of the given choices, the closest one is B) $25, which is the absolute value of the change in the tax RATE, but not the total change in taxes. Therefore, the best choice would be B) $25, although technically it is not the correct answer to the question as stated.

Question 2

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the size of the recessionary gap?

Accepted Answer

The recessionary gap is the difference between the equilibrium output (Y) and potential output (Y*) at the intersection of AD and SRAS. In Exhibit 12-3, the intersection occurs at a real output level of $800 billion (point A). Potential output is $1000 billion (point B) as given by the vertical line at potential GDP. Therefore, the recessionary gap is $200 billion, which is the difference between potential output and actual output (Y*-Y). The answer is D, $200.

Question 3

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

Accepted Answer

A contractionary gap, also known as a recessionary gap, occurs when the actual output in an economy is below the potential output level. This is often caused by a decrease in aggregate demand or a decrease in productivity, which leads to a decrease in employment and income.

Question 4

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could __________ autonomous net taxes by __________.

Accepted Answer

To increase equilibrium GDP by $100 billion through a change in autonomous net taxes, the government should decrease taxes by an amount that, when multiplied by the tax multiplier (MPC/(1-MPC)), results in a $100 billion increase in GDP.

Question 5

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Accepted Answer

The answer of Assume autonomous net taxes fall by $300;...

Question 6

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Accepted Answer

The answer of Assume autonomous net taxes rise by $500;...

Question 7

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Accepted Answer

Autonomous net taxes falling by $300 will increase disposable income by $300, which will increase consumption by 2/3 of that, or $200. Since saving equals disposable income minus consumption, and disposable income has increased by $300 while consumption has only increased by $200, saving will increase by $100.

Question 8

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

Accepted Answer

The short-run equilibrium level of real GDP is where the aggregate demand curve intersects with the short-run aggregate supply curve. In this case, that point is at $300 billion in real GDP and a price level of 40. Therefore, choice C is the correct answer. The other options are either above or below this point of intersection.

Question 9

By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?

Accepted Answer

The answer of By how much would government purchases have...

Question 10

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Accepted Answer

The answer of Assume autonomous net taxes fall by $300;...

Question 11

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Accepted Answer

The answer of Assume autonomous net taxes rise by $400;...

Question 12

If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will

Accepted Answer

If the short-run aggregate supply curve has a positive slope, then an expansionary gap occurs when real GDP is above potential GDP and the price level is higher than the expected level. To correct this, fiscal policy can be used to decrease aggregate demand, which can result in a decrease in both the price level and real GDP. Therefore, the best choice is E, which states that effective fiscal policy will reduce both the price level and real GDP.

Question 13

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

Accepted Answer

Autonomous net taxes decreasing by $300 will result in an increase in disposable income. The MPC is 2/3, so the change in disposable income will be 2/3 of the change in net taxes. Therefore, disposable income will rise by 2/3 * $300 = $200.

Question 14

If the government decreases net autonomous taxes by $100 billion and the MPC = 0.75, then equilibrium real GDP demanded will

Accepted Answer

The answer of If the government decreases net autonomous taxes...

Question 15

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Accepted Answer

The answer of Assume autonomous net taxes rise by $400;...

Question 16

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, the government could decrease government spending to shift the aggregate demand curve to AD' in order to eliminate the recessionary gap.

Accepted Answer

The answer of Exhibit 12-3
 
-In an economy characterized by...

Question 17

Exhibit 12-3
 
-In an economy characterized by Exhibit 12-3, there is a recessionary gap.

Accepted Answer

Exhibit 12-3 shows a situation where the aggregate expenditures (AE) line intersects the 45-degree line below the potential GDP line. This indicates that the economy is producing below its full potential and there is a recessionary gap.

Question 18

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals

Accepted Answer

The spending multiplier can be calculated as 1/ (1-MPC). In this case, the MPC is given as 2/3. Therefore, the spending multiplier is 1/ (1-2/3) = 1/ (1/3) = 3. So, a $300 decrease in autonomous net taxes will lead to a total decrease in spending of $900 (3 times the initial change). Therefore, the best choice is C.

Question 19

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

Accepted Answer

Autonomous net taxes are taxes that are not influenced by income or output, and thus are fixed. If they rise by $500, then disposable income will fall by the same amount. The marginal propensity to consume (MPC) is the fraction of additional income that is consumed. In this case, the MPC is 3/4, meaning that for every additional dollar of disposable income, 75 cents will be consumed. Therefore, if disposable income falls by $500, consumption will also fall, by 75% of $500, or $375.

Question 20

Exhibit 12-3 -The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3 is facing an expansionary gap.

Accepted Answer

The answer of Exhibit 12-3
 
-The economy characterized by the...

Quiz 13: Fiscal Policy

If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8, it should decrease autonomous net taxes by

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the size of the recessionary gap?

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could autonomous net taxes by .

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

If the government decreases net autonomous taxes by $100 billion and the MPC = 0.75, then equilibrium real GDP demanded will

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, the government could decrease government spending to shift the aggregate demand curve to AD' in order to eliminate the recessionary gap.

Exhibit 12-3 -In an economy characterized by Exhibit 12-3, there is a recessionary gap.

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

Exhibit 12-3 -The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3 is facing an expansionary gap.

Quiz 13: Fiscal Policy

If the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8, it should decrease autonomous net taxes by

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3, what would be the size of the recessionary gap?

A contractionary gap exists when aggregate demand is insufficient to sustain real output at the economy's potential output level.

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could __________ autonomous net taxes by __________.

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 0.75. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, equilibrium real GDP demanded will

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

By how much would government purchases have to change if the government wanted to increase income by $1,000 and the MPC were 0.9?

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, consumption will initially

If the short-run aggregate supply curve has a positive slope, effective fiscal policy to correct for an expansionary gap will

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

If the government decreases net autonomous taxes by $100 billion and the MPC = 0.75, then equilibrium real GDP demanded will

Assume autonomous net taxes rise by $400; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. As a result, saving will initially

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3, the government could decrease government spending to shift the aggregate demand curve to AD' in order to eliminate the recessionary gap.

Exhibit 12-3 -In an economy characterized by Exhibit 12-3, there is a recessionary gap.

Assume autonomous net taxes fall by $300; the MPC = 2/3. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. The value of the spending multiplier equals

Assume autonomous net taxes rise by $500; the marginal propensity to consume = 3/4. Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed. Disposable income will initially

Exhibit 12-3 -The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50 in Exhibit 12-3 is facing an expansionary gap.

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the size of the recessionary gap?

If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, it could autonomous net taxes by .

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, what would be the short-run equilibrium level of real GDP and the price level?

Exhibit 12-3 -In an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3, the government could decrease government spending to shift the aggregate demand curve to AD' in order to eliminate the recessionary gap.

Exhibit 12-3 -The economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS₅₀ in Exhibit 12-3 is facing an expansionary gap.