1) Contractionary fiscal policy is designed to increase aggregate demand. Is des
ID: 1153088 • Letter: 1
Question
1) Contractionary fiscal policy
is designed to increase aggregate demand.
Is designed to decrease aggregate demand.
Is designed to increase aggregate supply.
Is designed to decrease aggregate supply.
a, and c.
2) Expansionary fiscal policy
leads to an increase in a country’s output.
Leads to a reduction in a country’s output.
Increases the inventories below the desired level.
b and c.
a and c.
3) An inflationary gap can theoretically close on its own because.
Aggregate supply will gradually shift to the right as input prices decrease in the time of inflation.
Aggregate demand will gradually shift to the right as input prices decrease in the time of inflation.
Aggregate demand will gradually shift to the left as input prices increase in the time of inflation.
Aggregate supply will gradually shift to the left as input prices increase in the time of inflation.
None of the above.
4) Let c=0.8. Then
A 10 dollar increase in disposable income will increase consumption by 2 dollars.
A 10 dollar increase in disposable income will decrease consumption by 8 dollars.
A 10 dollar increase in disposable income will increase consumption by 8 dollars.
A 10 dollar decrease in disposable income will decrease consumption by 8 dollars.
c and d.
5) Let c=0.9. Then
A 10 dollar increase in disposable income will increase saving by 1 dollar.
A 10 dollar increase in disposable income will increase consumption by 9 dollars.
A 10 dollar increase in disposable income will increase consumption by 90 cents.
A 10 dollar decrease in disposable income will decrease consumption by 1 dollar.
a and b.
6) In the time of recession
The government deficit tends to increase as a result of expansionary fiscal policies.
The government deficit tends to decrease as a result of contractionary fiscal policies.
Increasing government expenditures is not appropriate.
It is appropriate to increase taxes.
d and c.
7) Which of the following is true?
The government expenditures multiplier increases as “c” increases.
Fiscal policy is successful only in recessions.
Fiscal policy fixes the economy quite rapidly because tax and spending policies affect aggregate demand instantly.
Consumer spending does not immediately react to income tax cuts.
Both a and d.
8) Which of the following is true?
A recessionary gap can be closed completely because of sticky wages.
Theoretically, an inflationary gap can eventually lead to stagflation.
Wages increase in the time of recession for reasons such as minimum wages, union contacts, and government restrictions.
a and b.
9) Which is more likely to happen as a result of a sudden reduction in aggregate demand?
Recession only.
Inflation only.
Stagflation.
None.
10) Which of the following is true?
In our simple model of aggregate demand the government expenditures multiplier is smaller than the tax multiplier.
The tax multiplier is negative suggesting that a reduction in taxes decreases our equilibrium output.
The tax multiplier is positive but smaller than the government expenditures multiplier.
None of the above.
Explanation / Answer
Answer 1 - is designed to decrease aggregate demand
Reason - contractionary fiscal policy is aimed to fight inflationary pressures. The government tries to decrease the demand of goods consumed by the household by increasing taxes, decreasing spending and trying to create a surplus budget.
Answer 2 - leads to increase in country's output
Reason - expansionary fiscal policy are sesidesi to increase the aggregate demand which in turn increases output and employment in the economy. Government increases its spending and decreases taxes which inturn increases demand and shifts aggregate demand curve to right.
Answer 3 - Aggregate demand will gradually shift to the left as input prices increase in the time of inflation.
Reason - inflationary gap closes on its own because as there is no corresponding increase in aggregate output, prices will continue to rise until aggregate output becomes equal to aggregate expenditure. This increase in prices shift the aggregate demand curve to left and the aggregate demand increases and ultimately becomes equal to the output and inflationary gap vanishes.
Answer 4 - A 10 dollar increase in disposable income will increase consumption by 8 dollars.
Reason - Marginal Propensity to Consume (MPC) is the ratio of the change in consumption to the change in disposable income. A marginal propensity to consume of 0.8 tells us that an additional $10 in take-home pay will lead to an additional $8 consumed.
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