Question 1

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 reduce consumption and investment, which will lead to a decrease in aggregate demand (AD) and cause the AD curve to shift to the left. Therefore, the correct choice is D - shift the AD curve to the left.

Question 2

Which are contractionary fiscal policies?

Accepted Answer

Contractionary fiscal policies are those which aim to decrease aggregate demand and curb inflationary pressures in an economy. Increasing taxation and decreasing government spending both serve to reduce the amount of money available to consumers and limit the amount of government spending in the economy, which can decrease demand for goods and services and reduce overall economic activity. Option A (increased taxation and increased government spending) is expansionary fiscal policy, option C (decreased taxation and no change in government spending) is neutral fiscal policy, and option D (no change in taxation and increased government spending) is also expansionary fiscal policy.

Question 3

Discretionary fiscal policy will stabilize the economy most when:

Accepted Answer

Discretionary fiscal policy involves using government spending and taxation to influence the economy. Deficits, or government spending exceeding revenues, can stimulate the economy during recessions by increasing demand and creating jobs. Surpluses, or government revenues exceeding spending, can help control inflation by reducing demand. Therefore, it is most effective to incur deficits during recessions and surpluses during inflations for maximum stabilization of the economy.

Question 4

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 the full-employment level of GDP, any further increase in demand could lead to inflation and thus would not be consistent with the goal of achieving price level stability. Option C, which involves decreasing government spending and increasing taxes, would decrease overall aggregate demand and help stabilize prices.

Question 5

Which combination of fiscal policy actions would be most contractionary for an economy experiencing severe demand-pull inflation?

Accepted Answer

Severe demand-pull inflation occurs when there is excess demand in the economy. To counteract this, the government should use contractionary fiscal policy, which involves reducing aggregate demand. Option C, which involves increasing taxes and decreasing government spending, is the most contractionary policy combination. Increased taxes will decrease disposable income and reduce spending, while decreased government spending will decrease overall spending in the economy. Both of these actions will help to reduce aggregate demand and counter the inflation.

Question 6

If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion at each price level by:

Accepted Answer

The answer of If the MPC in an economy is...

Question 7

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 8

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

Accepted Answer

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

Question 9

Assume that aggregate demand in the economy is excessive, causing an inflationary gap.Which of the following would be most in accord with appropriate government fiscal policy?

Accepted Answer

An increase in federal income tax rates would decrease disposable income and reduce consumption, thus lowering aggregate demand and closing the inflationary gap. B, C, and D are all forms of government spending or tax cuts that would increase aggregate demand and exacerbate the inflationary gap.

Question 10

An appropriate fiscal policy for severe demand-pull inflation is:

Accepted Answer

Severe demand-pull inflation occurs when there is too much demand for goods and services in the economy, resulting in prices increasing. To combat this, the appropriate fiscal policy would be to decrease aggregate demand. One way to decrease aggregate demand is to increase taxes, thereby reducing disposable income and consumption. Therefore, the best choice for severe demand-pull inflation is D, a tax rate increase.

Question 11

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 12

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 13

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

Accepted Answer

Option A is the most likely offsetting combination because an increase in taxes would decrease disposable income and reduce consumption, while an increase in government spending would increase aggregate demand. These actions work in opposite directions and could offset each other's effects.

Question 14

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 or increasing taxes, which results in lower aggregate demand. This can be illustrated by a leftward shift in the aggregate demand curve.

Question 15

A contractionary fiscal policy is shown as a:

Accepted Answer

Contractionary fiscal policy refers to a decrease in government spending and/or an increase in taxes, which leads to a reduction in aggregate demand. This reduction is shown as a leftward shift in the economy's aggregate demand curve. Therefore, the correct answer is D, a leftward shift in the economy's aggregate demand curve.

Question 16

Contractionary fiscal policy is so named because it:

Accepted Answer

Contractionary fiscal policy is aimed at reducing aggregate demand, which can result in decreased spending, lower economic growth, and ultimately achieve price stability. This can be achieved through measures such as increasing taxes or reducing government spending. The policy is not designed to explicitly contract real GDP, but it can have that effect in the short-term. It does not necessarily involve a contraction of the nation's money supply or necessarily reduce the size of government.

Question 17

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 18

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 19

Which of the following represents the most contractionary fiscal policy?

Accepted Answer

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

Question 20

An economist who advocates discretionary fiscal policy would recommend:

Accepted Answer

Discretionary fiscal policy involves the use of government spending and taxation to influence the economy. During a recession, an economist who advocates discretionary fiscal policy would recommend tax cuts to stimulate economic activity. During inflation, they would recommend reductions in government spending to reduce demand and curb inflation.

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