Wk 3 - Practice: Public Finance, Aggregate Demand and Aggregate Homework

Answer the next question using the following budget information for a hypothetical economy. All data are in billions of dollars. Also assume that all budget surpluses are used to pay down the public debt. Government Spending. Tax Revenues. GDP Year 1. $800 $825 $4,000 Year 2. 850 850 4,200 Year 3 900 875 4,350 Year 4 950

$125 billion

Which of the following is the largest expenditure item of local governments?

Education

The total amount of debt owed by the federal government is represented by the total value of the outstanding

U.S. government securities.

Use the following graph to answer the next question. If AD1 shifts to AD2, then the equilibrium output increases from

Y1 to Y2 while the price level rises from P1 to P2.

An increase in personal income taxes will cause a(n)

decrease (or shift left) in aggregate demand.

A decrease in government spending will cause a(n)

decrease in aggregate demand.

The intersection of the aggregate demand and aggregate supply curves determines the

equilibrium level of real domestic output and prices.

The aggregate demand curve shows the

inverse relationship between the price level and the quantity of real GDP purchased.

Use the following graphs to answer the next question. In the diagrams above, AD1 and AS1 represent the initial state of an economy. If full-employment output is at Y2, which diagram represents the adjustment back to full employment output in the absence of government intervention?

panel (B) only

Use the following graphs to answer the next question. In the diagrams, AD1 and AS1 are the "before" curves. Assuming Y1 is full-employment output, an expansion is depicted by

panel (C) only.

An aggregate supply curve represents the relationship between the

price level and the production of real domestic output.

Use the following graph to answer the next question. It depicts an economy in the

short run.

A federal budget deficit exists when federal government

spending exceeds tax revenues in a given year.

A tax structure is called progressive when

the average tax rate decreases if income decreases.

The long-run aggregate supply curve is

vertical.