Question 1

In the basic Keynesian model, an increase in transfer payments:

Accepted Answer

An increase in transfer payments stimulates the economy by increasing consumption, which increases short-run equilibrium output.

Question 2

In the basic Keynesian model, an increase in government purchases:

Accepted Answer

An increase in government purchases or any other component of aggregate expenditures increases short-run equilibrium output.

Question 3

In the short-run Keynesian model, if the mpc equals 0.8, then to decrease aggregate spending by $30 billion at any output level, government spending must be decreased by ______ or net taxes must be increased by _____.

Accepted Answer

If government spending is decreased by $30 billion, aggregate spending goes down by $30 billion. Tax hikes decrease spending but they also decrease savings. In order for households to decrease aggregate spending by $30 billion, their net taxes need to rise by more than $30 billion.

Question 4

Assuming that the government can act immediately before the multiplier takes effect, then to offset an increase in investment by $1 billion, government purchases must be:

Accepted Answer

A $1 billion increase in investment can be completely offset if government purchases (another type of expenditures) are decreased by $1 billion.

Question 5

A fiscal policy action to close a recessionary gap is to:

Accepted Answer

To close a recessionary gap, aggregate expenditures need to rise. Increased government purchases will increase aggregate expenditures.

Question 6

In the basic Keynesian model, a tax cut:

Accepted Answer

A tax cut stimulates the economy by increasing consumption, which increases short-run equilibrium output.

Question 7

Contractionary policies are government stabilization policies intended to decrease:

Accepted Answer

"Contractionary policies" are government stabilization policies intended to decrease spending and output.

Question 8

In the short-run Keynesian model, if the mpc equals 0.8, then to increase aggregate spending by $20 billion at any output level, government spending must be increased by ______ or net taxes must be decreased by _____.

Accepted Answer

If government spending is increased by $20 billion, aggregate spending goes up by $20 billion. Tax cuts increase spending but they also increase savings. In order for households to increase aggregate spending by $20 billion, they need to receive more than $20 billion in tax cuts.

Question 9

Assuming that the government cannot act immediately and the multiplier takes effect, ultimately creating a recessionary gap of $1 billion dollars. To close this gap, government purchases must be:

Accepted Answer

Due to the income-expenditure multiplier, a short-run recessionary gap of $1 billion can be closed with new government purchases of less than $1 billion.

Question 10

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ______ to eliminate any output gap.

Accepted Answer

If the multiplier is 10, a 100-unit decrease in government purchases results in a 1,000-unit decrease in output. This closes the expansionary output gap of 1,000.

Question 11

Assuming that the government can act immediately before the multiplier takes effect, then to offset a reduction in investment by $1 billion, government purchases must be:

Accepted Answer

A $1 billion decrease in investment can be completely offset if government purchases (another type of expenditures) are increased by $1 billion.

Question 12

In the basic Keynesian model, a decrease in government purchases:

Accepted Answer

A decrease in government purchases or any other component of aggregate expenditures reduces short-run equilibrium output.

Question 13

Expansionary policies are government stabilization policies intended to increase:

Accepted Answer

"Expansionary policies" are government stabilization policies intended to increase aggregate spending and output.

Question 14

Changes in government purchases affect spending:

Accepted Answer

Changes in government purchases affect spending directly because government purchases are a component of aggregate expenditures.

Question 15

Changes in taxes and transfers affect spending:

Accepted Answer

Changes in taxes and/or transfers indirectly affect spending because they inspire households to make changes to their consumption spending as disposable income changes.

Question 16

Changes in government purchases affect spending _____, and changes in taxes and/or transfers affect spending _______.

Accepted Answer

Changes in government purchases affect spending directly because government purchases are part of aggregate expenditure. However Changes in taxes and/or transfers will indirectly affect spending because they inspire households to make changes to their consumption spending as disposable income changes.

Question 17

In the basic Keynesian model, a decrease in transfer payments:

Accepted Answer

A decrease in transfer payments lowers consumption, which reduces short-run equilibrium output.

Question 18

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, potential output (Y*) equals 11,000, then government purchases must ______ to eliminate any output gap.

Accepted Answer

If the multiplier is 5, a 200-unit increase in government purchases results in a 1,000-unit increase in output. This closes the recessionary output gap of 1,000.

Question 19

Assuming that the government cannot act immediately and the multiplier takes effect, ultimately creating an expansionary gap of $10 billion dollars. To close this gap, government purchases must be:

Accepted Answer

Due to the income-expenditure multiplier, a short-run expansionary gap of $10 billion can be closed with decreased government purchases of less than $10 billion.

Question 20

In the basic Keynesian model, a tax increase:

Accepted Answer

A tax increase slows down the economy by decreasing consumption, which reduces short-run equilibrium output.

Quiz 10: Short-Term Economic Fluctuations and Fiscal Policy