Question 1

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

Accepted Answer

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

Question 2

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

Accepted Answer

A contractionary fiscal policy is designed to decrease aggregate demand. This can be achieved through a decrease in government spending or an increase in taxes. Either way, it would result in a leftward shift in the aggregate demand curve, as the total spending in the economy decreases.

Question 3

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 4

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 5

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $400 billion; (2) investment = $40 billion; (3) government purchases = $90 billion; and (4) net export = $25 billion.
If the full-employment level of GDP for this economy is $600 billion, then what combination of actions would be most consistent with the goal of achieving full employment?

Accepted Answer

To achieve full employment, the economy needs to reach the potential output of $600 billion. The given aggregate demand equals $555 billion ($400 + $40 + $90 + $25), which is less than the potential output. To increase aggregate demand to $600 billion, the government needs to increase its spending and/or decrease taxes. Therefore, choice D is the most consistent with the goal of achieving full employment.

Question 6

In a certain year the aggregate demand at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should:

Accepted Answer

To obtain full employment GDP, the aggregate demand needs to increase by $200 billion - ($100 billion + $40 billion + $10 billion + $20 billion) = $30 billion. This can be achieved by increasing government spending, which will increase aggregate demand through the multiplier effect. Reducing tax rates will also increase disposable income and consumption, further increasing aggregate demand. Therefore, choice C is the best option. Encouraging personal saving by increasing the interest rate on government bonds (choice A) and discouraging private investment by increasing corporate income taxes (choice D) will both decrease aggregate demand, making them the wrong choices. Decreasing government expenditures (choice B) will also decrease aggregate demand, which is not what is required to achieve full employment GDP.

Question 7

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 8

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 shift the AD curve to the left since both actions decrease aggregate demand in the economy. This results in a decrease in equilibrium GDP.

Question 9

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

To decrease aggregate demand by $24 billion, the government needs to reduce disposable income by $32 billion (since the MPC is .75, 1/0.75 = 1.33, and $24 billion / 1.33 = $18 billion. To reduce disposable income by $18 billion, the government needs to increase taxes by $8 billion (since the MPC is .75, 0.75 x $8 billion = $6 billion). Therefore, the answer is B, an increase of $8 billion in taxes.

Question 10

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be:

Accepted Answer

During a recession, the government may want to stimulate economic activity by increasing government spending or decreasing taxes to increase disposable income and boost consumer spending. The option of increasing taxation during a recession, known as contractionary fiscal policy, could potentially worsen the economic downturn by reducing consumer and business spending. Therefore, option B would be the most likely recommended discretionary fiscal policy to correct a recession while keeping prices stable.

Question 11

Countercyclical discretionary fiscal policy calls for:

Accepted Answer

Countercyclical discretionary fiscal policy aims to stabilize the economy by utilizing government spending to offset fluctuations in private sector spending. During a recession, there is a decrease in private sector spending, which can be offset through increased government spending, financed through deficits. Similarly, during a period of demand-pull inflation, there is excessive private sector spending that can be offset through reduced government expenditure, resulting in budget surpluses. Therefore, countercyclical discretionary fiscal policy calls for deficits during recessions and surpluses during periods of demand-pull inflation.

Question 12

Which of the following represents the most contractionary fiscal policy?

Accepted Answer

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

Question 13

Discretionary fiscal policy will stabilize the economy most when:

Accepted Answer

Discretionary fiscal policy involves using government spending and taxation to stabilize the economy. During a recession, the government can use expansionary fiscal policy by increasing spending and/or decreasing taxes to boost aggregate demand and stimulate the economy. This often leads to budget deficits, but it is necessary to help the economy recover. Conversely, during inflationary periods, the government can use contractionary fiscal policy by decreasing spending and/or increasing taxes to reduce aggregate demand and slow down the economy. This may lead to budget surpluses, but it is important to prevent the economy from overheating. Therefore, using deficits during recessions and surpluses during inflations is the most effective way to stabilize the economy through discretionary fiscal policy.

Question 14

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

To shift the aggregate demand curve leftward by $50 billion at each price level, the government needs to reduce spending by $50 billion/.4 = $125 billion. Therefore, the best choice is B, which reduces government expenditures by $20 billion, as this would result in a $50 billion reduction in aggregate demand. Both choices A and D result in too large of a reduction in government spending or too large of a increase in taxes to achieve the desired $50 billion reduction in aggregate demand. Choice C, increasing taxes by $50 billion, would also result in a larger reduction in aggregate demand than the desired $50 billion.

Question 15

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

Accepted Answer

Option A is offsetting because an increase in taxes would decrease aggregate demand, while an increase in government spending would increase aggregate demand. The two actions together would partially or completely cancel each other out, resulting in little or no overall impact on the economy.

Question 16

Which are contractionary fiscal policies?

Accepted Answer

Contracting fiscal policies are designed to decrease aggregate demand by reducing government spending and/or increasing taxes. Option B is an example of contractionary fiscal policy because it involves increasing taxes and decreasing government spending. This will reduce the disposable income of consumers, reduce their spending, and ultimately decrease aggregate demand in the economy.

Question 17

A contractionary fiscal policy is shown as a:

Accepted Answer

A contractionary fiscal policy involves the government decreasing its spending and/or increasing taxes, which decreases aggregate demand. This is represented by a leftward shift in the economy's aggregate demand curve.

Question 18

Within the aggregate demand and aggregate supply framework, fiscal policy that emphasizes activist government policies to stabilize the economy would view cutting personal income taxes as primarily a shift:

Accepted Answer

Cutting personal income taxes increases disposable income and therefore increases consumer spending. This results in an increase in aggregate demand, shifting the AD curve to the right.

Question 19

Contractionary fiscal policy is so named because it:

Accepted Answer

Contractionary fiscal policy is aimed at reducing aggregate demand through policies such as decreasing government spending and increasing taxes, with the goal of achieving price stability by reducing inflation. It is not designed to necessarily reduce the size of government or contract real GDP, and it may or may not involve a contraction of the nation's money supply, depending on the specific policy actions taken.

Question 20

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...

Quiz 11: Fiscal Policy, Deficits, Surpluses, and Debt