ch 13 quiz

If the MPC in an economy is 0.8, government could shift the aggregate demand curve rightward by $100 billion by

decreasing taxes by $25 billion.

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

Discretionary fiscal policy will likely cause budget

deficits during recessions and surpluses during periods of demand-pull inflation.Correct

Fiscal policy refers to

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither expansionary nor contractionary fiscal policy.

If the MPS in an economy is 0.40, government could shift the aggregate demand curve leftward by $60 billion by

reducing government expenditures by $24 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.40 = 2.5. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to decrease to get a decrease in aggregate demand of $60; so, $60 / 2.5 = $24. And then determine how much taxes need to increase to get a left shift in aggregate demand using the multiplier of 2.5. So, $60 / 2.5 = $24. But households use their income to both consume and save, so divide that amount by the MPC, $24 / 0.60.

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $48 billion to reduce inflationary pressure. The MPC is 0.75. By how much should the government raise taxes to achieve its objective?

$64 billion explanation:Because households use disposable income to both consume and to save, the tax increase needs to be larger than the desired reduction in consumption since only 0.75 of the tax increase will decrease consumption. Therefore, the MPC multiplied by the amount of the tax increase equals $48 billion, 0.75 × tax increase = $48 billion. Solving for the tax increase, $48 billion / 0.75 = $64 billion.

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $18 billion to reduce inflationary pressure. The MPC is 0.90. By how much should the government raise taxes to achieve its objective?

20 billion explation: Because households use disposable income to both consume and to save, the tax increase needs to be larger than the desired reduction in consumption since only 0.90 of the tax increase will decrease consumption. Therefore, the MPC multiplied by the amount of the tax increase equals $18 billion, 0.90 × tax increase = $18 billion. Solving for the tax increase, $18 billion / 0.90 = $20 billion.

An economy is experiencing a high rate of inflation. The government wants to reduce consumption by $36 billion to reduce inflationary pressure. The MPC is 0.60. By how much should the government raise taxes to achieve its objective?

60 billion explanation: Therefore, the MPC multiplied by the amount of the tax increase equals $36 billion, 0.60 × tax increase = $36 billion. Solving for the tax increase, $36 billion / 0.60 = $60 billion.

Refer to the diagram, in which Qf is the full-employment output. Expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD0.

Which of the following represents the most contractionary fiscal policy?

a $30 billion decrease in government spending

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative GDP gap.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing

an inflationary GDP gap.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to

do nothing since the economy appears to be achieving full-employment real output.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government expenditures or reduce taxes.

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

Suppose the federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $10 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by $30 billion. explanation: In this problem, add all four years using a "−" sign for the budget deficits and a "+" sign with budget surpluses. So − $40 − $50 + $10 + $50. If you get a positive amount, the public debt would have decreased and if the result is a negative amount, the public debt would have increased.

Suppose the federal government had budget deficits of $60 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by $40 billion. explanation: In this problem, add all four years using a "−" sign for the budget deficits and a "+" sign with budget surpluses. So − $60 − $50 + $20 + $50. If you get a positive amount, the public debt would have decreased and if the result is a negative amount, the public debt would have increased.

Suppose the federal government had budget deficits of $80 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the federal government's public debt would have

increased by $60 billion. explanation: In this problem, add all four years using a "−" sign for the budget deficits and a "+" sign with budget surpluses. So − $80 − $50 + $20 + $50. If you get a positive amount, the public debt would have decreased and if the result is a negative amount, the public debt would have increased.

If the MPS in an economy is 0.25, government could shift the aggregate demand curve rightward by $64 billion by

increasing government spending by $16 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.25 = 4. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to increase to get a increase in aggregate demand of $64; so, $64 / 4 = $16. And then determine how much taxes need to decrease to get a right shift in aggregate demand using the multiplier of 4. So, $64 / 4 = $16. But households use their income to both consume and save, so divide that amount by the MPC, $16 / 0.75. (Recall that the MPC is found by subtracting the MPS from 1.)

If the MPS in an economy is 0.25, government could shift the aggregate demand curve rightward by $72 billion by

increasing government spending by $18 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.25 = 4. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to increase to get a increase in aggregate demand of $72; so, $72 / 4 = $18. And then determine how much taxes need to decrease to get a right shift in aggregate demand using the multiplier of 4. So, $72 / 4 = $18. But households use their income to both consume and save, so divide that amount by the MPC, $18 / 0.75.

If the MPS in an economy is 0.10, government could shift the aggregate demand curve rightward by $50 billion by

increasing government spending by $5 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.10 = 10. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to increase to get a increase in aggregate demand of $50; so, $50 / 10 = $5. And then determine how much taxes need to decrease to get a right shift in aggregate demand using the multiplier of 10. So, $50 / 10 = $5. But households use their income to both consume and save, so divide that amount by the MPC, $5 / 0.90.

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

Discretionary fiscal policy is so named because it

involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress.

The effect of contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to

reduce government expenditures or increase taxes.

In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions, the government should

reduce tax rates and/or increase government spending.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

If the MPS in an economy is 0.50, government could shift the aggregate demand curve leftward by $20 billion by

reducing government expenditures by $10 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.50 = 2. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to decrease to get a decrease in aggregate demand of $20; so, $20 / 2 = $10. And then determine how much taxes need to increase to get a left shift in aggregate demand using the multiplier of 2. So, $20 / 2 = $10. But households use their income to both consume and save, so divide that amount by the MPC, $10 / 0.50.

If the MPS in an economy is 0.10, government could shift the aggregate demand curve leftward by $80 billion by

reducing government expenditures by $8 billion. explanation: Find the multiplier using the formula, 1 / MPS, so the Multiplier = 1 / 0.10 = 10. Then begin a process of elimination by first using the multiplier to find how much government expenditures need to decrease to get a decrease in aggregate demand of $80; so, $80 / 10 = $8. And then determine how much taxes need to increase to get a left shift in aggregate demand using the multiplier of 10. So, $80 / 10 = $8. But households use their income to both consume and save, so divide that amount by the MPC, $8 / 0.90. (

The effect of expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve.

In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will

shift the AD curve to the left.