1. Which of the following is an example of automatic, expansionary fiscal policy?
a. Lower unemployment compensation payments designed to reduce the cost of labor to businesses.
b. Higher unemployment compensation payments that occur when the economy is in a recession.
c. Higher taxes caused by increased incomes during an economic upturn.
d. Lower taxes caused by tax reform designed to lower tax rates on low-income families.
2. Assume the government cuts taxes by $125 billion. If the MPC=0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model?
a. Real GDP increases by $500 billion
b. Real GDP increases by $625 billion
c. Real GDP decreases by $500 billion
d. Real GDP decreases by $625 billion
3. Keynesian economics suggests that the most effective way to eliminate a recessionary gap is for government to:
a. increase its spending in order to increase aggregate demand
b. decrease its spending in order to balance the budget
c. increase taxes in order to increase tax revenues
d. decrease taxes and decrease government spending by the same amount.
4. If equilibrium income is $8,000 billion, full-employment income (natural real GDP) is
a. $500 billion increase in government spending will close the recessionary gap
b. $10 billion increase in government spending will close the recessionary gap
c. $50 billion increase in government spending will close the recessionary gap
d. change in government spending cannot help close the recessionary gap
1. Which of the following is an example of automatic, expansionary fiscal policy?
a. Lower unemployment compensation payments designed to reduce the cost of labor to businesses.
b. Higher unemployment compensation payments that occur when the economy is in a recession.
c. Higher taxes caused by increased incomes during an economic upturn.
d. Lower taxes caused by tax reform designed to lower tax rates on low-income families.
2. Assume the government cuts taxes by $125 billion. If the MPC=0.8, what is the maximum potential impact on real GDP according to the simple Keynesian model?
a. Real GDP increases by $500 billion
b. Real GDP increases by $625 billion
c. Real GDP decreases by $500 billion
d. Real GDP decreases by $625 billion
3. Keynesian economics suggests that the most effective way to eliminate a recessionary gap is for government to:
a. increase its spending in order to increase aggregate demand
b. decrease its spending in order to balance the budget
c. increase taxes in order to increase tax revenues
d. decrease taxes and decrease government spending by the same amount.
4. If equilibrium income is $8,000 billion, full-employment income (natural real GDP) is
a. $500 billion increase in government spending will close the recessionary gap
b. $10 billion increase in government spending will close the recessionary gap
c. $50 billion increase in government spending will close the recessionary gap
d. change in government spending cannot help close the recessionary gap
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The economy is in equilibrium, TP = TE, and Real GDP is $4,555 billion. The MPC is 0.80, the multiplier is operative, and idle resources exist at each expenditure round. Government purchases rise by $10 billion. As a result, the __________ curve shifts __________, inventory levels unexpectedly __________, business firms ___________ the quantity of goods and services they produce, and Real GDP __________ by __________.
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