ECON102 Lecture Notes - Lecture 8: Real Wages, Real Interest Rate, Tax Wedge

Fiscal policy is carried out primarily by

A) the Federal government.

B) state and local governments working together.

C) state governments alone.

D) local governments alone.

Fiscal policy refers to the:

A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

B) manipulation of government spending and taxes to achieve greater equality in the distribution of income.

C) altering the interest rate to change aggregate demand.

D) fact that equal increases in government spending and taxation will be contractionary. 

Expansionary fiscal policy is so named because it:

A) involves an expansion of the nation's money supply.

B) necessarily expands the size of government.

C) is aimed at achieving greater price stability.

D) is designed to expand real GDP.

An appropriate fiscal policy for severe demand-pull inflation is:

A) an increase in government spending.

B) depreciation of the dollar.

C) a reduction in interest rates.

D) a tax rate increase. 

29. The amount by which government expenditures exceed revenues during a particular year is the:

A) public debt.

B) budget deficit.

C) full-employment.

D) GDP gap.

30. If actual GDP is greater than potential GDP, we have

A) a negative GDP gap

B) a positive GDP gap

C) minimum GDP gap

D) maximum GDP gap 

31. Money functions as:

A) a store of value.

B) a unit of account.

C) a medium of exchange

D) all of the choices 

The Modified Keynesian Model

Y = C + I + G + X – IM … equilibrium condition in a 4-sector model where:

C = 150 + 0.9DI … consumption function

I = 50 … autonomous investment

G = 100 … autonomous government spending

X = 200 … autonomous exports

IM = 100 … autonomous imports

And also:

DI = Y – T + Tr T = 0 … autonomous taxes

Tr = 0 … autonomous transfer payments

YF = 5000 … full-employment Y

1. Solve for the equilibrium level of real output/income (Y*) in this economy.

2. Given the model above, net exports equal $________. Does this represent a trade deficit or trade surplus?

3. Given the model above, the federal budget has a (deficit/surplus) equal to $________.

4. What is the value of the MPC? … the value of the MPS?

5. Calculate the “oversimplified” expenditure multiplier.

6. Suppose that full-employment (YF) equals $5000. Is there a recessionary or inflationary output gap?

7. (Refer to question “6”.) How much is the gap equal to?

8. Suppose the government chooses to eliminate the gap by using expansionary fiscal policy (i.e., increasing G). Given the numbers above, by how much would government spending (G) need to increase to achieve the goal of full-employment?

9. Suppose instead that the government decided to lower taxes to eliminate the output gap in question “6”. How much would taxes need to fall to achieve the goal of full-employment?

10. Which action (raising G or lowering T) has the largest effect on the federal budget deficit and the national debt?

11. Suppose the national debt equaled $6000 before the tax cut (refer to question “9”). What would be the value of the national debt after this policy action?

1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?

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2. If the government wants to close a GDP gap, it can:

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3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:

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4. A drop in investment spending caused by increased government budget deficits is referred to as:

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5. Discretionary fiscal policy is best defined as:

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6. Which of the following can be considered as an automatic stabilizer in the economy?

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7. Which of the following is true about automatic stabilizers?

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8. Increased budget deficits

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9. The Ricadian Equivalence implies that when financing additional government expenditures

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10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.

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11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?

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1.

12.12. The term fiscal policy refers to

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13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will

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14. Which of the following is not a means to finance government spending?

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15. An automatic stabilizer is

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16. Budget deficits tend to grow during recessions because

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