Question 1

Exhibit 11-3
 
-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50.What is the size of the recessionary gap?  
A) $500 
B) $400 
C) $300 
D) $200

Accepted Answer

The answer of Exhibit 11-3
 
-Refer to the graph in...

Question 2

Assume autonomous net taxes rise by $500, and the marginal propensity to consume equals 0.75.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will equilibrium real GDP demanded change?  
A) It will rise by $500. 
B) It will fall by $500. 
C) It will rise by $1,500. 
D) It will fall by $1,500.

Accepted Answer

When autonomous net taxes increase, disposable income decreases, leading to a reduction in consumption. Given the marginal propensity to consume (MPC) is 0.75, the multiplier is 1/(1-MPC) = 4. Therefore, a $500 increase in taxes reduces equilibrium real GDP demanded by 4 times $500, which is $2000, not $1500 as initially calculated. The correct interpretation of the multiplier effect would indeed suggest a significant impact, but the precise numerical answer provided in the options does not align with the correct calculation. Thus, while the direction indicated in D is correct (a fall in GDP), the exact amount specified ($1,500) is based on an oversight in the calculation presented. The correct calculation should lead to a $2000 decrease, but given the options provided, D is the closest to the correct direction of change.

Question 3

Which of the following might be considered the most expansionary set of fiscal policies?  
A) increase government purchases, increase taxes, and decrease transfer payments 
B) decrease government purchases, increase taxes, and decrease transfer payments 
C) increase government purchases, decrease taxes, and increase transfer payments 
D) increase government purchases, increase taxes, and increase transfer payments

Accepted Answer

An expansionary fiscal policy aims to increase aggregate demand and stimulate economic growth. Increasing government purchases and transfer payments, and decreasing taxes can help boost aggregate demand. Option C includes all three expansionary policies, therefore it is the most expansionary set of fiscal policies.

Question 4

Exhibit 11-4
 
-Refer to the graph in the exhibit.What will happen in the economy if government purchases increase by the amount necessary to achieve full employment?  
A) The AD curve will shift to the right, the SRAS curve will shift to the left, and long-run equilibrium will be achieved. 
B) The AD curve will shift to the right, the price level will increase, and long-run equilibrium will be achieved. 
C) The AD curve will shift to the right, the price level will increase, and the expansionary gap will worsen. 
D) The AD curve will shift to the left, the price level will increase, and the contractionary gap will worsen.

Accepted Answer

An increase in government purchases will shift the Aggregate Demand (AD) curve to the right, leading to a higher price level. This adjustment moves the economy towards long-run equilibrium if it is initially at a point below full employment.

Question 5

Assume autonomous net taxes rise by $400, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will consumption initially change?  
A) It will fall by $400. 
B) It will rise by $400. 
C) It will fall by $300. 
D) It will rise by $300.

Accepted Answer

When autonomous net taxes increase by $400 and the marginal propensity to consume (MPC) is 3/4, the initial change in consumption will be a decrease of $300. This is because with an MPC of 3/4, for every dollar increase in net taxes, consumption decreases by 75 cents ($400 * 3/4 = $300).

Question 6

Exhibit 11-3
 
-Refer to the graph in the exhibit.Consider an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50.What is the short-run equilibrium level of real GDP and the price level?  
A) $300 and 20 
B) $500 and 20 
C) $300 and 40 
D) $500 and 50

Accepted Answer

The short-run equilibrium occurs where the aggregate demand curve (AD) intersects the short-run aggregate supply curve (SRAS50). At this intersection, the real GDP is $300 and the price level is 40.

Question 7

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will saving initially change?  
A) It will fall by $100. 
B) It will rise by $100. 
C) It will fall by $300. 
D) It will rise by $300

Accepted Answer

The MPC (Marginal Propensity to Consume) is 2/3, which means that for every $1 decrease in net taxes, consumption expenditure will increase by $2/3. Therefore, aggregate demand will increase by $200 ($300 x 2/3). As a result, savings will initially increase by $100 ($200 - $100 due to the fall in net taxes) according to the income-expenditure model.

Question 8

Suppose the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8.By what amount should the government decrease autonomous net taxes?  
A) by $20 
B) by $25 
C) by $100 
D) by $300

Accepted Answer

The formula for calculating the change in equilibrium income due to a change in autonomous net taxes is:
ΔY = - MPC x ΔT
where ΔY is the change in equilibrium income, MPC is the marginal propensity to consume, and ΔT is the change in autonomous net taxes.

In this case, the government wants to cause equilibrium income to rise by $100, so:

ΔY = $100

The MPC is given as 0.8, so:

MPC = 0.8

Substituting these values in the formula, we get:

$100 = - 0.8 x ΔT

Solving for ΔT, we get:

ΔT = -$125

Since the question asks for the amount by which the government should decrease autonomous net taxes, the answer is the absolute value of ΔT, which is $125. However, the answer options are in terms of the actual decrease in autonomous net taxes, so we need to choose the option that is closest to $125. The closest option is B) by $25, which is a decrease of $25 in autonomous net taxes.

Question 9

Assume autonomous net taxes rise by $400, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will saving initially change?  
A) It will fall by $400. 
B) It will fall by $100. 
C) It will rise by $100 
D) It will rise by $300.

Accepted Answer

The marginal propensity to consume (MPC) equals 3/4, which means that for every additional dollar of disposable income, consumers will spend 75 cents of it and save 25 cents.

With autonomous net taxes rising by $400, disposable income decreases by $400 (assuming no change in GDP) since taxes are an outflow.

The change in saving equals the change in disposable income times the MPC, which is: 
∆S = ∆Yd x MPC 
∆S = -$400 x 3/4 
∆S = -$300

Therefore, saving will fall by $100 ($300 decrease in saving – $400 decrease in disposable income from higher taxes).

Question 10

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.What is the value of the spending multiplier?  
A) 0 
B) 1 
C) 3 
D) 10

Accepted Answer

The spending multiplier (SM) is calculated as 1/MPS, where MPS is the marginal propensity to save. In this case, since the MPC is 2/3, MPS must be 1/3. Thus, SM=1/MPS=1/(1/3)=3. Therefore, a fall in autonomous net taxes by $300 will lead to an increase in total spending by $300 x SM = $300 x 3 = $900. Hence, option C is the correct answer.

Question 11

Which of the following fiscal policies will help close a recessionary gap?  
A) The government increases taxes by the size of the gap. 
B) The government decreases taxes by the size of the gap. 
C) The government increases taxes by more than the size of the gap. 
D) The government decreases taxes by less than the size of the gap.

Accepted Answer

The answer of Which of the following fiscal policies will...

Question 12

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, how will consumption initially change?  
A) It will rise by $300. 
B) It will fall by $300. 
C) It will rise by $200. 
D) It will fall by $200.

Accepted Answer

When autonomous net taxes fall by $300 and the marginal propensity to consume (MPC) is 2/3, the initial change in consumption is calculated as the decrease in taxes ($300) multiplied by the MPC (2/3), which equals $200.

Question 13

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.As a result, what will be the change in equilibrium real GDP demanded?  
A) It will fall by $300. 
B) It will rise by $300. 
C) It will fall by $600. 
D) It will rise by $600.

Accepted Answer

The change in equilibrium real GDP demanded can be calculated using the multiplier effect. The multiplier is 1/(1-MPC), which in this case is 1/(1-2/3) = 3. A $300 fall in autonomous net taxes increases disposable income, leading to an increase in consumption and thus an increase in equilibrium real GDP demanded by 3 times the initial change, which is $300 * 3 = $900. However, none of the provided options matches $900, indicating a potential misunderstanding in the question's setup or a mistake in the interpretation. Given the options, the closest logical answer based on the multiplier effect would be an increase, but the exact figures provided do not align with the standard multiplier calculation.

Question 14

Which of the following fiscal policies will help close a recessionary gap?  
A) The government increases government spending by the size of the gap. 
B) The government decreases government spending by the size of the gap. 
C) The government increases government spending by more than the size of the gap. 
D) The government increases government spending by less than the size of the gap.

Accepted Answer

The answer of Which of the following fiscal policies will...

Question 15

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.How will disposable income initially change?  
A) It will rise by $900. 
B) It will rise by $300. 
C) It will rise by $200. 
D) It will fall by $300.

Accepted Answer

Autonomous net taxes falling by $300 increases disposable income by the same amount, as disposable income is equal to national income minus net taxes. Since all other variables are assumed to be fixed and there is no mention of any other changes, disposable income will increase by $300.

Question 16

Suppose the short-run aggregate supply curve has a positive slope.And suppose an effective fiscal policy to correct for an expansionary gap effect is implemented.What variable will be affected?
 
A) only the price level, which will fall 
B) only real GDP, which will fall 
C) only the price level, which will rise 
D) the price level and real GDP, both of which will fall

Accepted Answer

If the short-run aggregate supply curve has a positive slope, it means that the economy is operating below full employment. To correct for this expansionary gap, an effective fiscal policy can be implemented, such as decreasing government spending or raising taxes. This will decrease aggregate demand, shifting it leftward, which will lead to a decrease in both the price level and real GDP. Therefore, the correct answer is D, the price level and real GDP, both of which will fall.

Question 17

Exhibit 11-4
 
-Refer to the graph in the exhibit.Suppose the government wants the economy to be at full employment.What should the government do to achieve this goal?  
A) decrease taxes 
B) decrease transfer payments 
C) decrease government purchases 
D) wait for the SRAS curve to shift to the left

Accepted Answer

Decreasing taxes can increase disposable income for consumers, leading to higher consumption and aggregate demand, which can help move the economy towards full employment.

Question 18

Assume autonomous net taxes rise by $500, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.How will disposable income initially change?  
A) It will rise by $500. 
B) It will fall by $375. 
C) It will fall by $500. 
D) It will fall by $2,000.

Accepted Answer

Autonomous net taxes are taxes that are not tied to changes in income or consumption. An increase in autonomous net taxes of $500 will directly reduce disposable income by the same amount. The marginal propensity to consume is 3/4, which means that 75% of any change in disposable income will be spent on consumption. Therefore, the decrease in disposable income of $500 will result in a reduction in consumption of $375 (3/4 of $500). The decrease in consumption will then lead to a reduction in aggregate demand and a decrease in equilibrium income.

Question 19

Exhibit 11-4
 
-Refer to the graph in the exhibit.Which one of the following sets of policies would move the economy to full employment?  
A) increase government purchases, increase taxes, and decrease transfer payments 
B) decrease government purchases, increase taxes, and decrease transfer payments 
C) increase government purchases, decrease taxes, and increase transfer payments 
D) increase government purchases, increase in taxes, and increase transfer payments

Accepted Answer

According to the graph, the economy is operating below full employment. To move the economy to full employment, expansionary fiscal policy is needed, which can be achieved through an increase in government purchases or an increase in transfer payments. Since an increase in taxes will decrease aggregate demand, it should not be a part of the policy mix. Therefore, option C is the best choice as it includes an increase in government purchases, a decrease in taxes, and an increase in transfer payments, which will increase aggregate demand and move the economy towards full employment.

Question 20

Exhibit 11-3
 
-Refer to the graph in the exhibit.If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, autonomous net taxes might decrease.If the decrease occurs, what is the likely amount?  
A) $100 billion 
B) $100 billion × (1 - MPC)/MPC 
C) $100 billion × MPC/(1 - MPC) 
D) $100 billion × MPC/(MPC - 1)

Accepted Answer

A decrease in autonomous net taxes would shift the aggregate demand curve to the right, increasing equilibrium GDP. The equation for the change in equilibrium GDP due to a change in autonomous net taxes is ΔY = MPC × ΔT. Solving for ΔT given a desired increase in equilibrium GDP of $100 billion, we get ΔT = $100 billion × MPC/(1 - MPC).

Quiz 12: Fiscal Policy

Exhibit 11-3 -Refer to the graph in the exhibit.Consider an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50.What is the size of the recessionary gap?

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

Which of the following might be considered the most expansionary set of fiscal policies?

Exhibit 11-4 -Refer to the graph in the exhibit.What will happen in the economy if government purchases increase by the amount necessary to achieve full employment?

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

Exhibit 11-3 -Refer to the graph in the exhibit.Consider an economy characterized by the aggregate demand curve AD and the short-run aggregate supply curve SRAS50.What is the short-run equilibrium level of real GDP and the price level?

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

Suppose the government wants to cause equilibrium income to rise by $100 through a change in autonomous net taxes and the MPC is 0.8.By what amount should the government decrease autonomous net taxes?

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

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

Which of the following fiscal policies will help close a recessionary gap?

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

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

Which of the following fiscal policies will help close a recessionary gap?

Assume autonomous net taxes fall by $300, and the MPC equals 2/3.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.How will disposable income initially change?

Suppose the short-run aggregate supply curve has a positive slope.And suppose an effective fiscal policy to correct for an expansionary gap effect is implemented.What variable will be affected?

Exhibit 11-4 -Refer to the graph in the exhibit.Suppose the government wants the economy to be at full employment.What should the government do to achieve this goal?

Assume autonomous net taxes rise by $500, and the marginal propensity to consume equals 3/4.Net exports, planned investment, taxes, and government purchases are autonomous and remain fixed.How will disposable income initially change?

Exhibit 11-4 -Refer to the graph in the exhibit.Which one of the following sets of policies would move the economy to full employment?

Exhibit 11-3 -Refer to the graph in the exhibit.If the government wants to increase equilibrium by $100 billion through a change in autonomous net taxes, autonomous net taxes might decrease.If the decrease occurs, what is the likely amount?