Question 1

An expansionary fiscal policy is shown as a:

Accepted Answer

An expansionary fiscal policy, such as increasing government spending or cutting taxes, is designed to increase aggregate demand in the economy. This will lead to a rightward shift in the economy's aggregate demand curve.

Question 2

An economy is experiencing a high rate of inflation.The government wants to reduce GDP by $36 billion to reduce inflationary pressure.The MPC is .75.By how much should the government raise taxes to achieve its objective?

Accepted Answer

To calculate the change in GDP required to reduce inflationary pressure, we can use the formula ∆GDP = (∆T)/MPC, where ∆T is the change in taxes required and MPC is the marginal propensity to consume, which in this case is 0.75.

∆GDP = -$36 billion (since the government wants to reduce GDP by this amount)
MPC = 0.75
∆T = (∆GDP) x MPC / (-1)  [We multiply ∆GDP by -1 to get a positive value for ∆T]

∆T = ($36 billion x 0.75) / (-1) = -$27 billion
Therefore, the government needs to RAISE taxes by $12 billion (since the question asks for a positive value of ∆T).

Question 3

Expansionary fiscal policy is so named because it:

Accepted Answer

Expansionary fiscal policy is designed to increase aggregate demand and stimulate economic growth, which results in an expansion of real GDP. This is often accomplished through increases in government spending or cuts in taxes, which increase disposable income and consumer spending.

Question 4

If the MPC in an economy is .8,government could shift the aggregate demand curve rightward by $100 billion at each price level by:

Accepted Answer

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

Question 5

An appropriate fiscal policy for a severe recession is:

Accepted Answer

During a severe recession, a decrease in tax rates would stimulate spending and investment, which can help to jumpstart economic growth. Decreasing government spending may worsen the recession and prolong the economic downturn. Appreciation of the dollar and an increase in interest rates would likely lead to a decrease in spending and investment, exacerbating the recession.

Question 6

If the MPS in an economy is .1,government could shift the aggregate demand curve rightward by $40 billion at each price level by:

Accepted Answer

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

Question 7

In an aggregate demand and aggregate supply graph,an expansionary fiscal policy can be illustrated by a:

Accepted Answer

An expansionary fiscal policy is used to boost economic activity by increasing government spending and/or cutting taxes. This leads to an increase in aggregate demand as consumers have more disposable income to spend and the government is spending more. As a result, there is a rightward shift in the aggregate demand curve, indicating an increase in both the price level and real GDP.

Question 8

In an economy,the government wants to increase aggregate demand by $48 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .75,then it could:

Accepted Answer

The government can use fiscal policy to increase aggregate demand by either increasing government spending or reducing taxes. Since the MPC is 0.75, we can use the following formula to calculate the fiscal policy needed to increase aggregate demand by $48 billion:

ΔY = ΔG + MPC × ΔT

Where ΔY is the increase in real GDP, ΔG is the change in government spending, MPC is the marginal propensity to consume, and ΔT is the change in taxes.

We know that ΔY = $48 billion and MPC = 0.75, so substituting these values into the formula, we get:

$48 billion = ΔG + 0.75 × ΔT

Solving for ΔT, we get:

ΔT = ($48 billion - ΔG) / 0.75

Since we want to use the smallest fiscal policy action possible, we want to minimize the change in government spending. Therefore, we should choose the option that minimizes ΔG. We can do this by plugging in different values for ΔG and solving for ΔT. For example:

If ΔG = $0, then ΔT = $64 billion
If ΔG = $12 billion, then ΔT = $48 billion
If ΔG = $24 billion, then ΔT = $32 billion
If ΔG = $36 billion, then ΔT = $16 billion
If ΔG = $48 billion, then ΔT = $0

We can see that the option that minimizes ΔG and achieves our desired fiscal policy is to reduce taxes by $16 billion (option B). Therefore, the answer is B.

Question 9

Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP.It could:

Accepted Answer

The answer of Suppose that in an economy with a...

Question 10

Discretionary fiscal policy is so named because it:

Accepted Answer

Discretionary fiscal policy involves deliberate and specific changes in government spending (G) and/or taxes (T) aimed at achieving macroeconomic stabilization goals. It is not automatic or controlled by the central bank, which is responsible for monetary policy.

Question 11

In an economy,the government wants to increase aggregate demand by $50 billion at each price level to increase real GDP and reduce unemployment.If the MPS is .4,then it could increase government spending by:

Accepted Answer

To calculate the change in government spending, we need to use the following formula:

∆Y = (1/(1-MPC)) x ∆G

∆Y = $50 billion (given)
MPS = 0.4
MPC = 1 - MPS = 0.6

Substituting these values in the formula, we get:

$50 billion = (1/(1-0.6)) x ∆G
$50 billion = (1/0.4) x ∆G
$50 billion = 2.5 x ∆G
∆G = $20 billion

Therefore, the government could increase its spending by $20 billion to achieve its goal. The correct choice is B.

Question 12

A tax reduction of a specific amount will be more expansionary,the:

Accepted Answer

The larger the economy's MPC (marginal propensity to consume), the more likely individuals are to spend the additional income from the tax reduction, leading to a larger increase in aggregate demand and hence more expansionary effects.

Question 13

Fiscal policy refers to the:

Accepted Answer

Fiscal policy involves the government's use of spending and taxation to influence aggregate demand and stabilize the economy. This can be done to stabilize output, employment, and the price level, as mentioned in option A. Option B describes redistribution policy, which is a separate aim of fiscal policy. Option C refers to monetary policy, which is a separate tool of macroeconomic policy. Option D is incorrect and does not accurately describe the effects of fiscal policy.

Question 14

Discretionary fiscal policy refers to:

Accepted Answer

Discretionary fiscal policy refers to the deliberate changes in government spending and taxes made by the government to stabilize the economy. It is done to achieve macroeconomic objectives such as price stability, economic growth, and full employment. The other options are incorrect as they do not fully capture the concept of discretionary fiscal policy.

Question 15

Fiscal policy is carried out primarily by:

Accepted Answer

Fiscal policy is mainly carried out by the federal government through its power to set taxes, allocate government spending, and control public debt. While provincial and local governments may have some role in spending and taxation, it is primarily the federal government that has the authority and resources to implement fiscal policy at a national level.

Question 16

If a government wants to pursue an expansionary fiscal policy,then a tax cut of a certain size will be more expansionary the:

Accepted Answer

A tax cut will be more effective in stimulating spending and boosting the economy when the MPS (Marginal Propensity to Save) is smaller. This is because a smaller MPS indicates that consumers are more likely to spend the additional income from the tax cut, rather than save it. The larger the MPS, the more likely it is that consumers will save the additional income instead of spending it, which would reduce the effectiveness of the expansionary fiscal policy.

Question 17

In an economy,the government wants to increase aggregate demand by $60 billion at each price level to increase real GDP and reduce unemployment.If the MPC is .9,then it could:

Accepted Answer

The answer of In an economy,the government wants to increase...

Question 18

Assume the economy is in the midst of a severe recession.Which of the following policies would be consistent with discretionary fiscal policy?

Accepted Answer

A reduction in federal tax rates on personal and corporate income is consistent with discretionary fiscal policy during a severe recession because it aims to stimulate consumer and business spending, which can boost aggregate demand and help to lift the economy out of the recession. The other options, such as incurring a federal surplus, reducing subsidies and benefits, and postponing public projects, may be fiscally responsible, but they would not provide immediate stimulus to the economy during a recession.

Question 19

Which of the following represents the most expansionary fiscal policy?

Accepted Answer

An increase in government spending would put more money into the economy and stimulate growth, making it the most expansionary fiscal policy option listed. A tax cut (A) could also stimulate growth, but not to the same degree as an increase in spending. A tax increase (C) or a decrease in government spending (D) would both reduce overall spending in the economy and lead to contraction, making them contractionary fiscal policy options.

Question 20

If the government wishes to increase the level of real GDP,it might reduce:

Accepted Answer

Reducing taxes can increase disposable income and incentivize consumption and investment, which can lead to an increase in aggregate demand and real GDP. The other options may lead to a decrease in aggregate demand and can have a contractionary effect on the economy.

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