Question 1

Which of the following does NOT describe the views of classical economists?  
A) They advocated laissez-faire policies to promote economic growth. 
B) They believed the economy would naturally tend toward full employment. 
C) They believed prices and wages react slowly to market changes. 
D) They discouraged government intervention in markets.

Accepted Answer

Classical economists believed in the flexibility of prices and wages, arguing that they adjust quickly to changes in supply and demand to ensure full employment and optimal economic performance. This contrasts with the view described in option C, which suggests a slower reaction to market changes, more in line with Keynesian economics.

Question 2

Suppose government increases its purchases by $100 billion.Why will this have a greater effect on real GDP than a $100 billion reduction in net taxes?  
A) because some of the income that consumers gain from the tax reduction will be saved rather than spent 
B) because some of the income that consumers gain from the tax reduction will be spent on services rather than on products 
C) because some of the income that consumers gain from the tax reduction will be spent on goods made in foreign countries 
D) because the consumers' MPC is higher than the government's MPC

Accepted Answer

When government increases its purchases by $100 billion, it directly adds to the aggregate demand for goods and services, leading to an increase in real GDP. On the other hand, a $100 billion reduction in net taxes will provide consumers with extra disposable income, but not all of it will be spent on goods and services. Some of the income may be saved, which does not directly affect the aggregate demand for goods and services in the economy. As a result, the effect of a tax reduction on real GDP is less than the effect of an increase in government purchases of the same amount.

Question 3

What effective argument did John Maynard Keynes use to influence fiscal policy in Canada?  
A) Balancing the national budget at all times is sound economic policy. 
B) Natural economic forces are NOT necessarily adequate to move the economy toward its potential output level. 
C) The government does NOT need to stimulate output in order for the economy to achieve its potential output level. 
D) Increases in taxes and increases in government purchases are equally effective in closing an expansionary gap.

Accepted Answer

Keynes argued that natural economic forces alone cannot always move the economy towards its potential output level and that government intervention through fiscal policy is necessary to stimulate demand and stabilize economic fluctuations.

Question 4

Suppose the economy is already at its potential output.What is the spending multiplier?  
A) zero in the long run 
B) infinite in the long run 
C) 1 in the long run 
D) zero in the short run

Accepted Answer

In the long run, when the economy is at its potential output, any increase in spending will not affect the output level, as the economy is already operating at full capacity. Therefore, the spending multiplier is zero in the long run.

Question 5

Which of the following characterizes Keynes' views of macroeconomics?  
A) Fiscal policy should NOT be used to influence the economy. 
B) The economy eventually tends toward the potential output level. 
C) For the economy to reach the potential output level, the SRAS curve must shift to the right. 
D) The economy could be stuck at equilibrium below the potential output level for a prolonged period.

Accepted Answer

Keynes believed that the economy could be stuck at equilibrium below the potential output level for a prolonged period, unless there was government intervention in the form of fiscal policy. He also believed that the economy did not necessarily tend towards potential output on its own, and that the SRAS curve could remain stable or shift in either direction depending on various factors.

Question 6

Which of the following best describes the concept of laissez-faire?  
A) Government should NOT intervene in the economy. 
B) Government should actively intervene in the economy whenever it judges the action to be beneficial. 
C) Government should intervene in the economy only to promote short-term economic stability. 
D) Government should intervene in the economy only to maximize long-term growth rates.

Accepted Answer

Laissez-faire is a French term that translates to "leave alone," and it refers to the concept that government should NOT intervene in the economy. This means that businesses should be allowed to operate freely, without government regulations or interference.

Question 7

Suppose there is a change in government purchases.Under what circumstances will such a change have the greatest effect on the economy in the short run?  
A) if the aggregate demand curve is relatively flat 
B) if the aggregate demand curve is relatively steep 
C) if the short-run aggregate supply curve is relatively flat 
D) if the aggregate demand curve is vertical

Accepted Answer

A relatively flat short-run aggregate supply curve means that changes in government purchases will lead to larger changes in output and employment, as prices are less likely to rise significantly.

Question 8

Suppose the economy is experiencing an expansionary gap of $1,000 and the MPC equals 0.8.With an upward-sloping short-run aggregate supply curve, by what amount will the government decrease purchases in order to close the gap?  
A) by $0 
B) by $80 
C) by $200 
D) by $1,000

Accepted Answer

To close the expansionary gap of $1,000, the government needs to decrease aggregate demand by reducing government purchases, decreasing transfer payments, or increasing taxes. Based on the MPC of 0.8, we can use the government spending multiplier formula to determine the change in government purchases needed to close the gap. The formula is:

Change in Real GDP = Spending Multiplier x Change in Government Purchases

Spending Multiplier = 1 / (1 - MPC) = 1 / (1 - 0.8) = 5

Change in Real GDP = $1,000

Therefore, we can solve for the change in government purchases needed as:

$1,000 = 5 x Change in Government Purchases

Change in Government Purchases = $200

Therefore, the best choice is C) by $200, which represents the decrease in government purchases needed to close the expansionary gap.

Question 9

What is the opposite of a laissez-faire economic policy?  
A) active government intervention 
B) a reliance on prices in order to adjust to changing market conditions 
C) classical economics 
D) neoclassical economics

Accepted Answer

Laissez-faire is a policy of minimal government intervention in the economy. Therefore, the opposite would be active government intervention in the economy.

Question 10

Suppose that the economy has an expansionary gap of $1,000 and the MPC equals 0.8.With an upward-sloping short-run aggregate supply curve, by what amount will the government increase autonomous net taxes in order to close the gap?  
A) by $0 
B) by $80 
C) by $250 
D) by $1,000

Accepted Answer

The MPC of 0.8 means that for every $1 increase in autonomous net taxes, consumption will decrease by $0.80. To close the expansionary gap of $1,000, the government needs to decrease aggregate demand by $1,000. Since autonomous net taxes are part of government spending, increasing taxes would decrease aggregate demand. To decrease aggregate demand by $1,000, the government needs to increase autonomous net taxes by $1,000/0.8 = $1,250. However, the question asks for the amount by which the government needs to increase autonomous net taxes to close the gap, not to decrease aggregate demand by the full amount. Therefore, the correct answer is $1,000/0.8 = $250. The other choices are incorrect because they are either too low or do not reflect the effect of the MPC.

Question 11

Who argued that the economy should be left to itself to close a recessionary gap?  
A) Pierre Elliott Trudeau 
B) John Maynard Keynes 
C) the mercantilists 
D) the classical economists

Accepted Answer

The classical economists, such as Adam Smith and David Ricardo, believed that the economy should be left to itself and that government intervention would only make things worse. They believed that eventually the market would correct itself and return to full employment.

Question 12

Which of the following best characterizes the effects of the flatness of the short-run aggregate supply curve?  
A) the flatter the short-run aggregate supply curve, the larger the value of the spending multiplier 
B) the flatter the short-run aggregate supply curve, the smaller the value of the spending multiplier 
C) the flatter the short-run aggregate supply curve, the larger the impact of a shift in aggregate demand on the equilibrium price level 
D) the flatter the short-run aggregate supply curve, the larger the impact of a shift in aggregate demand on the equilibrium output level

Accepted Answer

The flatter the short-run aggregate supply curve, the larger the impact of a shift in aggregate demand on the equilibrium output level. This is because a flatter curve means that producers are more willing and able to increase output in response to an increase in demand, leading to a larger increase in output for a given shift in demand.

Question 13

According to classical economists, what causes economic depression and high unemployment?  
A) wars 
B) tax decreases 
C) good crop growing seasons 
D) technological changes

Accepted Answer

The answer of According to classical economists, what causes economic...

Question 14

What does the steepness of the short-run aggregate supply curve depend on?  
A) a larger-than-expected simple multiplier 
B) a smaller-than-expected simple multiplier 
C) the increase in labour costs as output expands 
D) how sharply production costs increase as output expands

Accepted Answer

The steepness of the short-run aggregate supply curve depends on how sharply production costs increase as output expands. If production costs increase sharply as output expands, then the SRAS curve will be relatively steep.

Question 15

Which of the following did Keynes think was a macroeconomic problem?  
A) The economy can tend toward an equilibrium level of output that is below the potential level. 
B) The economy tends toward a potential level of output that is below the equilibrium level. 
C) The economy makes the potential and equilibrium levels of output equal. 
D) The economy can be pushed below the equilibrium level of output by fiscal policy.

Accepted Answer

Keynes believed that the economy could tend toward an equilibrium level of output that is below its potential level, which he called "underemployment equilibrium." This was a major macroeconomic problem that he sought to address through his theories of aggregate demand and government intervention.

Question 16

How will a steeper short-run aggregate supply curve affect equilibrium output?  
A) The impact of a shift in aggregate demand on equilibrium output will be smaller. 
B) The value of the spending multiplier will be larger, and will thus have a greater impact on equilibrium output. 
C) The impact of a shift in aggregate demand on equilibrium output will be larger. 
D) A smaller change in government spending will be needed to achieve the desired change in equilibrium output.

Accepted Answer

A steeper short-run aggregate supply curve means that changes in aggregate demand will have a smaller effect on output and a larger effect on prices. This is because a steeper curve indicates less flexibility in the economy's ability to increase production in response to increased demand.

Question 17

Suppose the economy is already producing at its potential.What is the spending multiplier?  
A) 1/(1 - MPC) in the long run 
B) less than 1/(1 - MPC) in the long run 
C) more than 1/(1 - MPC) in the long run 
D) zero in the long run

Accepted Answer

If the economy is already producing at its potential, then there is no spare capacity to increase production further through an increase in spending. Therefore, the spending multiplier is zero in the long run. This means that any increase in spending will only cause prices to go up, rather than increasing the output.

Question 18

Which of the following did Keynes think was a macroeconomic problem?  
A) The potential level of output and the equilibrium levels of output can be the same. 
B) The equilibrium level of output can never be equal to the potential level of output. 
C) Over time, the potential level of output may be pulled down to the equilibrium level of output. 
D) The equilibrium level of output can fall below the potential level of output.

Accepted Answer

Keynes believed that there could be a situation where the equilibrium level of output (i.e. the actual level of output in the short run) could fall below the potential level of output (i.e. the maximum output that can be produced in the long run with all available resources). This is known as a recessionary gap, and Keynes believed that government intervention was necessary to boost aggregate demand and bring the economy back to its potential level of output. Option A is incorrect because Keynes believed that the two levels of output could be the same, but only if there is full employment. Option B is incorrect because Keynes' theory of aggregate demand and the use of fiscal policy was aimed at closing the gap between the actual and potential level of output. Option C is incorrect because while demand deficiency can lead to a recessionary gap, there are other factors (such as supply-side shocks) that can also affect potential output.

Question 19

Which of the following does NOT describe the philosophy of classical economists?  
A) They criticized mercantilism as an economic system. 
B) They advocated laissez-faire policies to promote economic growth. 
C) They believed the economy would naturally tend toward full employment. 
D) They sought government intervention in markets to promote fairness.

Accepted Answer

Classical economists did not believe in government intervention in markets to promote fairness. They believed in free markets and minimal government intervention to promote economic growth.

Question 20

What lesson emerged from the occurrence of the Great Depression in Canada?  
A) Potential GDP could be too low to ensure full employment in a capitalist economy. 
B) Potential GDP could be too low to ensure full employment in a market economy. 
C) Potential GDP could fall short of full-employment GDP. 
D) Potential GDP could exceed equilibrium GDP.

Accepted Answer

The answer of What lesson emerged from the occurrence of...

Quiz 12: Fiscal Policy

Which of the following does NOT describe the views of classical economists?

Suppose government increases its purchases by $100 billion.Why will this have a greater effect on real GDP than a $100 billion reduction in net taxes?

What effective argument did John Maynard Keynes use to influence fiscal policy in Canada?

Suppose the economy is already at its potential output.What is the spending multiplier?

Which of the following characterizes Keynes' views of macroeconomics?

Which of the following best describes the concept of laissez-faire?

Suppose there is a change in government purchases.Under what circumstances will such a change have the greatest effect on the economy in the short run?

Suppose the economy is experiencing an expansionary gap of $1,000 and the MPC equals 0.8.With an upward-sloping short-run aggregate supply curve, by what amount will the government decrease purchases in order to close the gap?

What is the opposite of a laissez-faire economic policy?

Suppose that the economy has an expansionary gap of $1,000 and the MPC equals 0.8.With an upward-sloping short-run aggregate supply curve, by what amount will the government increase autonomous net taxes in order to close the gap?

Who argued that the economy should be left to itself to close a recessionary gap?

Which of the following best characterizes the effects of the flatness of the short-run aggregate supply curve?

According to classical economists, what causes economic depression and high unemployment?

What does the steepness of the short-run aggregate supply curve depend on?

Which of the following did Keynes think was a macroeconomic problem?

How will a steeper short-run aggregate supply curve affect equilibrium output?

Suppose the economy is already producing at its potential.What is the spending multiplier?

Which of the following did Keynes think was a macroeconomic problem?

Which of the following does NOT describe the philosophy of classical economists?

What lesson emerged from the occurrence of the Great Depression in Canada?