18.For fiscal policy to be most effective, we must have: A. perfectly flexible w
ID: 1225079 • Letter: 1
Question
18.For fiscal policy to be most effective, we must have:
A. perfectly flexible wages and prices.
B. a vertical AS curve.
C. accurate information about the state of the economy.
D. a balanced government budget in each year.
E. a high marginal propensity to save.
19.The most likely effect of expansionary fiscal policy when the economy is at full employment is:
A. a higher rate of economic growth.
B. an increase in aggregate supply.
C. a decrease in the natural rate of unemployment.
D. lower interest rates.
E. accelerating inflation.
20.An important similarity between the Keynesian model and the AD/AS model is that:
A. in both models, prices change when there is a change in spending.
B. both models allow for government intervention in the short run.
C. both models predict that the economy will move towards full employment automatically.
D. in both models, the price level stays constant when there is a change in spending.
E. in both models real GDP stays constant when there is a change in spending.
21.The best definition of government debt is:
A. the difference between government spending and tax revenue in any one year.
B. it's always larger than the government deficit.
C. the amount the government spends in any one year.
D. all the money the government owes at any point in time.
E. increasing when the government runs a surplus.
Explanation / Answer
18. A. perfectly flexible wages and prices.
19. E. accelerating inflation.
Since economy is in equilibrium then increase in government spending or reduction in taxes increase the money supply leads to rightward shift of AD curve. Employment is at its equilibrium which means employment cannot be increased so economy will face inflation.
20. B. both models allow for government intervention in the short run.
Price level is fixed under Keynesian model only. Output level is constant under classical model rather than Keynesian or AD AS model.
21.D. all the money the government owes at any point in time.
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