Question 1

Suppose the government institutes a new investment tax credit. This is likely to

Accepted Answer

A new investment tax credit encourages more investment, which increases aggregate demand. The shift in the aggregate demand curve is equal to the initial change in investment times the spending multiplier.

Question 2

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that

Accepted Answer

The answer of As discussed in the Case in Point...

Question 3

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) Suppose the aggregate demand curve is AD₁.All of the following events would more likely bring the economy back to the natural rate of unemployment except

Accepted Answer

A one-time surcharge on individual income tax liabilities would decrease disposable income for consumers, leading to a decrease in consumption and a decrease in aggregate demand. This would make it less likely for the economy to return to the natural rate of unemployment. The other options would increase aggregate demand, making it more likely for the economy to return to the natural rate of unemployment.

Question 4

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Accepted Answer

The decrease in investment spending of $100 billion will lead to a decrease in aggregate demand by $120 billion ($100 billion x 1.2). It does not affect the aggregate supply curve since it does not change the production capacity or costs of production.

Question 5

Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

Accepted Answer

The formula for the spending multiplier is: 1/(1-MPC). 
Thus, the spending multiplier in this case is 4/(1-0.75) = 16. 
Therefore, the aggregate demand curve will shift leftward by: 
$600 billion x 16 = $9,600 billion. 
However, the question asks how much the curve will shift at a given price level, so we need to divide by the price level. 
Assuming the price level remains constant, the aggregate demand curve will shift leftward by: 
$9,600 billion / 4 = $2,400 billion. 
Therefore, the answer is B.

Question 6

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Accepted Answer

The formula for the impact of government spending on aggregate demand is GDP multiplier x change in government spending. In this case, the change in government spending is $700 billion and the GDP multiplier is 2. Therefore, the impact on aggregate demand is 2 x $700 billion = $1,400 billion.

Question 7

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) If the aggregate demand curve is AD₀, which of the following is the most appropriate discretionary fiscal policy to pursue?

Accepted Answer

The answer of Use the following to answer questions .
Exhibit:...

Question 8

The impact of instituting investment tax credits is

Accepted Answer

Instituting investment tax credits provides an incentive for businesses to invest in capital goods, which stimulates private sector investments and increases aggregate demand. This, in turn, can boost economic growth and job creation.

Question 9

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by John Taylor on the effect of fiscal policy since the year 2000 suggests that

Accepted Answer

The answer of As discussed in the Case in Point...

Question 10

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Accepted Answer

An increase in government purchases represents additional spending, while households save part of an increase in income from transfer payments. This means that the increase in government purchases has a larger impact on aggregate demand because it increases overall spending in the economy, while an increase in transfer payments may not lead to as much additional spending.

Question 11

Suppose the government increases the corporate income tax rate. This is

Accepted Answer

Increasing the corporate income tax rate is a contractionary fiscal policy, which reduces investment and shifts the aggregate demand curve to the left by an amount equal to the initial change in investment times the spending multiplier.

Question 12

Suppose that when income taxes are reduced by $400 billion, households increase consumption
By 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. At a given price level, the aggregate demand curve shifts to the right by

Accepted Answer

The multiplier effect is 2, so the increase in aggregate demand is 2 * $400 billion = $800 billion. However, households only increase consumption by 80% of the increase in disposable income, so the actual increase in aggregate demand is 0.8 * $800 billion = $640 billion.

Question 13

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) Suppose the aggregate demand curve is AD₂.All of the following events would more likely bring the economy back to the natural rate of unemployment except

Accepted Answer

A cut in withholding rates increases disposable income, boosting consumption and aggregate demand, which would not help bring the economy back to the natural rate of unemployment if the goal is to reduce demand.

Question 14

Suppose that income taxes are reduced by $400 billion and households increase consumption by
80% of the resulting change in disposable income. Suppose also that the multiplier is 2.
What is the marginal propensity to consume?

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that a household consumes. Here, households increase consumption by 80% of the change in disposable income, which means the MPC is 0.8.

Question 15

An increase in government transfer payments will shift the aggregate demand curve to the right

Accepted Answer

An increase in government transfer payments will increase disposable income, leading to an increase in consumption spending. The spending multiplier amplifies the initial increase in consumption, resulting in a rightward shift of the aggregate demand curve.

Question 16

Consider two fiscal policy actions.
I. a $400 billion reduction in income taxes
II. a $400 billion increase in government purchases
Which policy will have a bigger impact on aggregate demand?

Accepted Answer

Policy II will have a bigger impact on aggregate demand because it directly affects government purchases, which are a component of aggregate demand. Policy I works through consumption, which is a component of aggregate demand, but the degree to which it affects consumption depends on the marginal propensity to consume of households, which may vary. Therefore, Policy II is the better choice for directly impacting aggregate demand.

Question 17

Suppose a country institutes an investment tax credit and that leads to an initial increase in investment spending of $100 billion. Suppose the multiplier is 1.5 and the economy's real GDP is $5,000 billion. This action is

Accepted Answer

The initial increase in investment spending of $100 billion will lead to a further increase in real GDP. Since the multiplier is 1.5, the increase in real GDP will be $150 billion (multiplier x initial increase in investment spending). Therefore, the aggregate demand curve will shift to the right by $150 billion.

Question 18

Suppose a country decreases government purchases by $400 billion. Suppose the government spending multiplier is 1.5 and the economy's real GDP is $8,000 billion. This contractionary policy action shifts the aggregate demand curve to the left by

Accepted Answer

The decrease in government purchases by $400 billion, with a government spending multiplier of 1.5, results in a leftward shift of the aggregate demand curve by $400 billion * 1.5 = $600 billion.

Question 19

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) If the aggregate demand curve is AD₁, which of the following is the most appropriate discretionary fiscal policy to pursue?

Accepted Answer

An expansionary fiscal policy, such as increasing government spending and investment tax credits, is appropriate when the goal is to shift the aggregate demand curve to the right, thereby stimulating economic growth.

Question 20

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) If the aggregate demand curve is AD₂, which of the following is the most appropriate discretionary fiscal policy to pursue?

Accepted Answer

The aggregate demand curve is representing an inflationary gap since it intersects the long-run aggregate supply curve to the right of the potential output. To close this gap, contractionary fiscal policy is needed. Option B involves reducing government spending and increasing income tax rates, which will decrease aggregate demand and help stabilize prices.

Quiz 12: Government and Fiscal Policy

Suppose the government institutes a new investment tax credit. This is likely to

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by Jonathan Parker on the effect of fiscal policy during recessions suggests that

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) Suppose the aggregate demand curve is AD1. All of the following events would more likely bring the economy back to the natural rate of unemployment except

Suppose a country repeals an investment tax credit and that leads to a decrease in investment spending of $100 billion. Suppose the multiplier is 1.2 and the economy's real GDP is $5,000 billion. This contractionary action

Suppose that income taxes are increased by $600 billion. If the marginal propensity to consume is 0.75 and the spending multiplier is 4, by how much will the aggregate demand curve shift at a given price level?

Suppose a country increases government purchases by $700 billion. Suppose the government spending multiplier is 2 and the economy's real GDP is $6,000 billion. This policy action shifts the aggregate demand curve to the right by

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) If the aggregate demand curve is AD0, which of the following is the most appropriate discretionary fiscal policy to pursue?

The impact of instituting investment tax credits is

As discussed in the Case in Point on the size of the fiscal multiplier, a study conducted by John Taylor on the effect of fiscal policy since the year 2000 suggests that

Which of the following best explains why a $10 billion increase in transfer payments has a smaller impact on aggregate demand than a $10 billion increase in government purchases?

Suppose the government increases the corporate income tax rate. This is

Suppose that when income taxes are reduced by $400 billion, households increase consumption By 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. At a given price level, the aggregate demand curve shifts to the right by

Use the following to answer questions . Exhibit: Fiscal Policy Options -(Exhibit: Fiscal Policy Options) Suppose the aggregate demand curve is AD2. All of the following events would more likely bring the economy back to the natural rate of unemployment except

Suppose that income taxes are reduced by $400 billion and households increase consumption by 80% of the resulting change in disposable income. Suppose also that the multiplier is 2. What is the marginal propensity to consume?