Econ 202 Chapter 21
Fiscal policies that contract GDP or economic activities
Contractionary Fiscal Policy
What is Y with line on top mean?
- Full employment of level output/GDP - Amount of output/GDP that country can produce by fully employing its factor of production
Fiscal policies that increase GDP or economic activities
Expansionary Fiscal Policy
If the interest rate becomes zero percent, then the Fed cannot boost the economy anymore by lowering interest rate
Liquidity Trap
If MPC is 0.9, then which of the following is the value of multiplier? a.) 10 b.) 5 c.) 3 d.) 20
a.) 10 Spending Multiplier = 1 / (1-MPC) 1 / (1-0.9) --> 10
Suppose prices increase but income and interest rate are unchanged. Then what happens to money demand? a.) Increases b.) Decreases c.) Remains unchanged
a.) Increases
With everything else being equal, what happens if money supply decreases? a.) The interest rate increases b.) The interest rate decreases c.) The interest rate remains unchanged
a.) The interest rate increases
An expansionary fiscal policy increases the interest rate causing the private investment to down. This in turn causes the aggregate demand to decreases. This called Crowding Out Effect: a.) True b.) False
a.) True
Liquidity Trap is a situation when the interest rate becomes zero and the central bank's policy becomes ineffective to help the economy. a.) True b.) False
a.) True
If the Congress cuts government spending in order to balance the budget, then, with everything else being equal: a.) Aggregate Demand will increase b.) Aggregate Demand will decrease c.) Aggregate Demand will remain unchanged
b.) Aggregate Demand will decrease
Suppose interest rate rises, but income and prices are unchanged. What happens to money demand? a.) Increases b.) Decreases c.) Remains unchanged
b.) Decreases
Which of the following is an example of Expansionary Fiscal policy? a.) Lowering tax rate b.) Increasing government spending c.) Both of the above d.) None of the above
c.) Both of the above
Which of the following is an example of Contractionary Fiscal policy? a.) Lowering tax rate b.) Increasing government spending c.) Increasing taxes d.) None of the above
c.) Increasing taxes
Which of the following variables money demand depends on? a.) Income b.) Interest rate c.) Price level d.) All of the above
d.) All of the above
