Question 1

Suppose the MPC is 0.60. Assume there are no crowding out or investment accelerator effects. If the government increases expenditures by $200 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $200 billion, then by how much does aggregate demand shift to the right?
A)$300 billion and $180 billion
B)$300 billion and $300 billion
C)$500 billion and $300 billion
D)$500 billion and $500 billion

Accepted Answer

The answer of Suppose the MPC is 0.60. Assume there...

Question 2

If the government cuts the tax rate, workers get to keep
A)less of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
B)less of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.
C)more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
D)more of each additional dollar they earn, so work effort decreases, and aggregate supply shifts left.

Accepted Answer

If the government cuts the tax rate, workers get to keep more of each additional dollar they earn, which creates an incentive to work harder and longer. This increased work effort leads to an increase in aggregate supply, shifting it to the right.

Question 3

Supply-side economists believe that changes in government purchases affect
A)only aggregate demand.
B)only aggregate supply.
C)both aggregate demand and aggregate supply.
D)neither aggregate demand nor aggregate supply.

Accepted Answer

Supply-side economists believe that changes in government purchases affect both aggregate demand and aggregate supply. This is because they believe that government spending can stimulate productivity and investment, which can lead to an increase in both the quantity and quality of goods and services produced in the economy. This, in turn, can lead to an increase in aggregate supply. Furthermore, supply-side economists believe that policies aimed at promoting economic growth, such as tax cuts or deregulation, can also increase aggregate supply by encouraging businesses to invest and expand production.

Question 4

Most economists believe that fiscal policy
A)only affects aggregate demand and not aggregate supply.
B)primarily affects aggregate demand.
C)primarily effects aggregate supply.
D)only affects aggregate supply and not aggregate demand.

Accepted Answer

Most economists believe that fiscal policy primarily affects aggregate demand by changing government spending, taxes or transfers to stimulate or cool down the economy.

Question 5

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
A)$283 billion and $254.7 billion
B)$283 billion and $283 billion
C)$300 billion and $270 billion
D)$300 billion and $300 billion

Accepted Answer

The answer of Suppose the MPC is 0.9. There are...

Question 6

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was
A)zero.
B)likely smaller than if the cut had been permanent.
C)likely about the same as if the cut had been permanent.
D)likely larger than if the cut had been permanent.

Accepted Answer

Temporary tax cuts are generally believed to have a smaller impact on consumer spending and aggregate demand than permanent ones because consumers may save rather than spend the additional income, anticipating the tax cut's temporary nature.

Question 7

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $50 billion to the left. The government wants to change its spending to offset this decrease in demand. The MPC is 0.80. Suppose the effect on aggregate demand from a change in taxes is 4/5 the size of the change from government expenditures. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in aggregate demand?
A)Raise both taxes and expenditures by $5.56 billion dollars.
B)Raise taxes by $40 billion dollars and increase expenditures by $50 billion dollars.
C)Reduce taxes by $10 billion dollars and increase expenditures by $10 billion dollars.
D)Reduce taxes by $5.56 billion dollars and increase expenditures by $5.56 billion dollars.

Accepted Answer

The answer of Initially, the economy is in long-run equilibrium....

Question 8

A tax cut shifts the aggregate demand curve the farthest if
A)the MPC is large and if the tax cut is permanent.
B)the MPC is large and if the tax cut is temporary.
C)the MPC is small and if the tax cut is permanent.
D)the MPC is small and if the tax cut is temporary.

Accepted Answer

A tax cut shifts the aggregate demand curve the farthest if the marginal propensity to consume (MPC) is large and the tax cut is perceived as permanent. A large MPC means consumers are likely to spend a significant portion of any extra income they receive, and a permanent tax cut is more likely to encourage spending rather than saving, as people expect their higher disposable income to last.

Question 9

If households view a tax cut as temporary, then the tax cut
A)has no effect on aggregate demand.
B)has more of an effect on aggregate demand than if households view it as permanent.
C)has the same effect as when households view the cut as permanent.
D)has less of an effect on aggregate demand than if households view it as permanent.

Accepted Answer

If households view the tax cut as temporary, they are less likely to increase their spending as they may anticipate future tax increases to offset the cut. Therefore, the tax cut will have less of an effect on aggregate demand compared to if households view it as a permanent cut.

Question 10

An increase in government spending on goods to build or repair infrastructure
A)shifts the aggregate demand curve to the right.
B)has a multiplier effect.
C)shifts the aggregate supply curve to the right, but this effect is likely more important in the long run.
D)All of the above are correct.

Accepted Answer

Increasing government spending on goods to build or repair infrastructure would lead to an increase in aggregate demand as it is one of the components of GDP. This would shift the aggregate demand curve to the right (Option A). Additionally, there would be a multiplier effect as the increased government spending would lead to increased income and consumption, further increasing aggregate demand (Option B). There could also be a shift in the aggregate supply curve in the long run due to the improved infrastructure, but this effect may not be as significant as the short-run impact on aggregate demand (Option C). Therefore, all of the statements are correct (Option D).

Question 11

Supply-side economists believe that a reduction in the tax rate
A)always decrease government tax revenue.
B)shifts the aggregate supply curve to the right.
C)provides no incentive for people to work more.
D)would decrease consumption.

Accepted Answer

According to supply-side economists, reducing tax rates will increase the incentives for producers to produce more goods and services, which will shift the aggregate supply curve to the right. This is because producers will be able to keep a larger share of their income, which can be reinvested in their businesses or used to hire more workers. This increased production can ultimately lead to economic growth and an increase in government tax revenue, despite lower tax rates.

Question 12

If Congress increases taxes to balance the federal budget, then to prevent additional unemployment and a recession the Fed can
A)reduce interest rates by increasing the money supply.
B)increase interest rates by decreasing the money supply.
C)increase interest rates by increasing the money supply.
D)reduce interest rates by decreasing the money supply.

Accepted Answer

Increasing taxes would reduce consumer and business spending, which would lead to an economic slowdown and potentially higher unemployment. To offset this, the Fed could increase the money supply and lower interest rates to encourage borrowing and spending, which would stimulate economic activity.

Question 13

An decrease in taxes shifts aggregate demand
A)to the right. The larger the multiplier is, the farther it shifts.
B)to the right. The larger the multiplier is, the less it shifts.
C)to the left. The larger the multiplier is, the farther it shifts.
D)to the left. The larger the multiplier is, the less it shifts.

Accepted Answer

A decrease in taxes increases disposable income, which in turn increases consumption and thus shifts aggregate demand to the right. The size of the shift depends on the size of the multiplier effect, which captures the extent to which an initial change in spending is magnified throughout the economy. The larger the multiplier, the greater the impact of the tax decrease on spending and the larger the shift in aggregate demand.

Question 14

Initially, the economy is in long-run equilibrium. The aggregate demand curve then shifts $80 billion to the left. The government wants to change spending to offset this decrease in demand. The MPC is 0.75. Suppose the effect on aggregate demand of a tax change is 3/4 as strong as the effect of a change in government expenditure. There is no crowding out and no accelerator effect. What should the government do if it wants to offset the decrease in real GDP?
A)Raise both taxes and expenditures by $80 billion dollars.
B)Raise both taxes and expenditures by $10 billion dollars.
C)Reduce both taxes and expenditures by $80 billion dollars.
D)Reduce both taxes and expenditures by $10 billion dollars.

Accepted Answer

The answer of Initially, the economy is in long-run equilibrium....

Question 15

When government expenditures increase, the interest rate
A)increases, making the change in aggregate demand larger.
B)increases, making the change in aggregate demand smaller
C)decreases, making the change in aggregate demand larger.
D)decreases, making the change in aggregate demand smaller.

Accepted Answer

When government expenditures increase, there is an increased demand for loanable funds, which causes the interest rate to increase. This increase in interest rate leads to a decrease in investment spending and consumption spending, which ultimately reduces the overall change in aggregate demand. Therefore, the answer is B, as an increase in interest rate due to government expenditures reduces the impact on aggregate demand, making the change smaller.

Question 16

A tax cut shifts aggregate demand
A)by more than the amount of the tax cut.
B)by the same amount as the tax cut.
C)by less than the tax cut.
D)None of the above is necessarily correct.

Accepted Answer

The answer of A tax cut shifts aggregate demand
A)by more...

Question 17

Most economists believe that a cut in tax rates
A)would generally increase government tax revenue.
B)would have no effect on aggregate demand.
C)has a relatively small effect on the aggregate-supply curve.
D)All of the above are correct.

Accepted Answer

While there is some debate amongst economists, the general consensus is that a cut in tax rates would have a small effect on the aggregate-supply curve, as it would increase incentives for work and investment, leading to increased productivity and output. However, it is unlikely to increase government tax revenue, as the increase in economic activity is unlikely to completely offset the reduction in tax rates. Additionally, it may have some effect on aggregate demand, but the magnitude and direction of this effect is highly dependent on various other factors affecting the economy.

Question 18

An increase in government spending shifts aggregate demand
A)to the right. The larger the multiplier is, the farther it shifts.
B)to the right. The larger the multiplier is, the less it shifts.
C)to the left. The larger the multiplier is, the farther it shifts.
D)to the left. The larger the multiplier is, the less it shifts.

Accepted Answer

An increase in government spending will shift the aggregate demand curve to the right, as it increases total spending in the economy. The size of the shift will depend on the multiplier effect, which is the amount by which an initial change in spending is multiplied throughout the economy. The larger the multiplier effect, the farther the aggregate demand curve will shift to the right.

Question 19

Permanent tax cuts shift the AD curve
A)farther to the right than do temporary tax cuts.
B)not as far to the right as do temporary tax cuts.
C)farther to the left than do temporary tax cuts.
D)not as far to the left as do temporary tax cuts.

Accepted Answer

Permanent tax cuts provide individuals and firms with the certainty of lower taxes into the future, increasing their confidence to spend and invest, which in turn shifts the aggregate demand (AD) curve to the right by a larger amount than temporary tax cuts. Temporary tax cuts, on the other hand, may not provide the same level of confidence and may only have a short-term impact on spending and investment, resulting in a smaller shift in the AD curve to the right.

Question 20

Supply-side economists focus more than other economists on
A)how fiscal policy affects consumption.
B)the multiplier effect of fiscal policy.
C)how fiscal policy affects aggregate supply.
D)the money supply.

Accepted Answer

Supply-side economists focus on how fiscal policy affects aggregate supply, which includes factors such as the availability and cost of inputs, technology, and incentives for production. They believe that policies such as tax cuts and deregulation can stimulate economic growth by encouraging firms to increase production and investment. They also emphasize the importance of removing barriers to entrepreneurship and innovation.

Quiz 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand

If the government cuts the tax rate, workers get to keep

Supply-side economists believe that changes in government purchases affect

Most economists believe that fiscal policy

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

A tax cut shifts the aggregate demand curve the farthest if

If households view a tax cut as temporary, then the tax cut

An increase in government spending on goods to build or repair infrastructure

Supply-side economists believe that a reduction in the tax rate

If Congress increases taxes to balance the federal budget, then to prevent additional unemployment and a recession the Fed can

An decrease in taxes shifts aggregate demand

When government expenditures increase, the interest rate

A tax cut shifts aggregate demand

Most economists believe that a cut in tax rates

An increase in government spending shifts aggregate demand

Permanent tax cuts shift the AD curve

Supply-side economists focus more than other economists on