ECO 1000 Lecture Notes - Lecture 80: Aggregate Demand, Tax Rate, Real Interest Rate

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4 Apr 2018

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Which of the following is the primary source of changes in output within the framework of keynesian analysis? changes in aggregate demand. According to the keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate? an increase in government expenditures and/or a reduction in taxes. When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment. When the economy enters a recession, automatic stabilizers create larger budget deficits. The marginal propensity to consume (mpc) is additional consumption expenditures divided by additional disposable income. According to the keynesian view, an unanticipated reduction in spending will raise business inventories and lead to a decline in output. Keynesian countercyclical budget policy suggests that a budget deficit is needed if the economy is operating at less than full employment.

Related Questions

Automatic stabilizers lead to changes in taxation and government spending as economic output varies. How do automatic stabilizers impact tax revenue and government spending during a recession?

Tax revenue will:

a. increase

b. not change

c. decrease

and government spending will:

a. increase

b. not change

c. decrease

Suppose that the government is required to balance the budget. Which of the following is an appropriate discretionary approach during a recession and what effect would it have to the economy?

a. Invest in public infrastructure that promotes employment and stimulates the economy.

b. Cut government spending to equal tax revenue possibly magnifying the effects of a recession.

c. Increase government spending to stimulate the economy causing an increase in overall aggregate demand.

d. Cut taxes to encourage consumer spending which would minimize the effects of the recession.

magentalion70

48. In order to be classified officially as unemployed, a personmust
a. Be out of work and available for work, need not be activelylooking for work
b. Be out of work, actively looking for work, and currentlyavailable for work
c. Only be out of work
d. Have been out of work for over 3 months

49. If exports rise and imports fall, (ceteris paribus)
a. Aggregate expenditure falls
b. Aggregate expenditure rises
c. Aggregate expenditure remains the same
d. Net exports are irrelevant when considering aggregateexpenditure

50. Over the past 25 years, the U.S. has had a net trade____________; which means
the U.S. has exported _________ it has imported.
a..Deficit; less than
b. Balance; the same amount as
c. Deficit; more than
d. Surplus; more than

43. If our economy was experiencing inflation, which of thefollowing would move us
back toward macro equilibrium?
a. Lower Taxes
b. Increase Investment
c. Reduce Net Exports
d. Increase Consumer Spending

42. If our economy slumped into a recession, which of the followingwould help move us back toward macro equilibrium?:
a. Reduce Taxes
b. Reduce Investment
c. Reduce Net Exports
d. Reduce Government Purchases

34. Economists consider that we are at full employment whenthe
a. Officially reported unemployment rate is at the naturalunemployment rate, about 5%
b. Natural unemployment rate is equal to 10 %.
c. Officially reported unemployment rate is zero.
d. Natural unemployment rate is equal to 0 percent.

35. Beginning at macro equilibrium, inflation occurs becauseaggregate
a. supply increases more rapidly than aggregate demand.
b. supply and aggregate demand increase at the same rate.
d. supply and aggregate demand decrease at the same rate.
c. demand increases more rapidly than aggregate supply.

36. If the U.S. government decreases significantly its expenditureon defense, then, ceteris paribus, the aggregate
a. demand curve shifts rightward.
b. demand curve shifts leftward.
c. supply curve shifts rightward.
d. supply curve shifts leftward.

37. According to Keynesian economics, which of the following ismost likely to raise the unemployment rate?
a. Aggregate demand increases.
b. Aggregate demand decreases.
c. Aggregate supply increases.
d. None of the above is likely to raise the unemploymentrate.

38. If a government has a budget deficit, it must
a. raise the real interest rate.
b. borrow in the financial market.
c. decrease taxes.
d. Increase spending

39. The U.S. gross public debt is approximately ________________which is
approximately ______________ % of U.S. GDP.

40. Under the U.S. Constitution, the ultimate power for determiningfiscal policy is:
e. The President
f. The Congress
g. The Council of Economic Advisors
h. The State governments

32. The Marginal Propensity to Consume (MPC) is:
e. The rate at which consumption changes over time
f. The percentage of an additional dollar of disposable income thatwill go toward additional consumption
g. The average percentage of total income one consumes
h. The average percentage of total income one saves

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

Answer

	a.	The aggregate demand curve will shift to the right.
	b.	The economy will always approach potential GDP.
	c.	The marginal propensity to consume will increase.
	d.	The average price level will increase.
	e.	The aggregate demand curve will shift to the left.

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

Answer

	a.	lower government spending on social security.
	b.	adopt contractionary fiscal policies to control inflation.
	c.	increase its budget deficit.
	d.	repay its borrowings.
	e.	raise both direct and indirect tax rates.

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:

Answer

	a.	lowering average tax rates such that aggregate supply is increased.
	b.	increasing government spending such that aggregate expenditures are increased.
	c.	increasing transfer payments such that aggregate expenditures decline.
	d.	raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased.
	e.	decreasing government spending such that aggregate demand is reduced.

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

Answer

	a.	the multiplier effect.
	b.	crowding out.
	c.	an expansionary gap.
	d.	the paradox of thrift.
	e.	the Ricardian equivalence.

5. Discretionary fiscal policy is best defined as:

Answer

	a.	the deliberate manipulation of the money supply to expand the economy.
	b.	the deliberate change in tax laws and government spending to change equilibrium income.
	c.	the policy action taken by the Congress to reduce the federal budget deficit.
	d.	the arbitrary fluctuation in tax laws and budget requirements.
	e.	the automatic change in certain fiscal instruments when real GDP changes.

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

Answer

	a.	Money supply
	b.	Disposable income
	c.	Real exchange rate
	d.	Real interest rate
	e.	Unemployment insurance

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

Answer

	a.	When income rises, automatic stabilizers increase/boost spending.
	b.	Automatic stabilizers are a part of discretionary fiscal policy.
	c.	An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations.
	d.	Any kind of trade policy adopted by the government will be considered as an automatic stabilizer.
	e.	The interest rate is an example of an automatic stabilizer.

8. Increased budget deficits

Answer

	a.	can cause interest rates to increase and hence decrease net exports
	b.	have no effect on net exports
	c.	can cause interest rates to decrease and hence increase net exports
	d.	never impose additional interest costs on the government

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

Answer

	a.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way.
	b.	there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way.
	c.	increasing borrowing is the best option
	d.	increasing current taxes is the best option

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 ____.

Answer

	a.	right; decrease; increase
	b.	right; decrease; decrease
	c.	left; decrease; decrease
	d.	left; increase; increase
	e.	right; increase; increase

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?

Answer

	a.	A decrease of $35
	b.	An increase of $105
	c.	An increase of $35
	d.	A decrease of $105
	e.	A decrease of $15

12.12. The term fiscal policy refers to

Answer

	a.	the adjustment of the GDP for inflation.
	b.	the purchase and sale of U.S. government securities to regulate the money supply.
	c.	the use of government spending and taxation to influence the level of economic growth and inflation.
	d.	the use of fines to penalize unfair business practices.
	e.	a policy action by Congress to overrule unpopular budget cuts by the president.

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

Answer

	a.	raise the price level and leave real GDP unchanged.
	b.	raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged.
	c.	raise both real GDP and the price level by a multiple of the initial spending increase.
	d.	have no effect on real GDP or on the price level, because all private investment will be crowded out.
	e.	lower real GDP by an amount equal to the spending increase and reduce inflation.

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

Answer

	a.	Government subsidies
	b.	Government debt
	c.	Capital gains taxes
	d.	Personal income taxes
	e.	Money creation

15. An automatic stabilizer is

Answer

	a.	a change in government spending aimed at achieving a policy goal.
	b.	an element of fiscal policy that automatically changes in value as real GDP changes.
	c.	an element of monetary policy that automatically changes in value as real GDP changes.
	d.	a decrease in tax rates as the economy moves into a recession.
	e.	a deliberate change in taxation aimed at increasing real GDP.

16. Budget deficits tend to grow during recessions because

Answer

	a.	real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow.
	b.	real GDP growth is positive, which reduces both tax receipts and transfer payments.
	c.	real GDP growth is negative, which reduces transfer payments in relation to tax receipts.
	d.	real GDP growth is negative, which reduces tax receipts in relation to government expenditures.
	e.	real GDP growth is positive, which increases tax receipts in relation to government expenditures.

ECO 1000 Lecture Notes - Lecture 80: Aggregate Demand, Tax Rate, Real Interest Rate

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