[Solved] A Change in Tax Rates

An increase in government purchases of $20 billion will shift the aggregate demand curve to the right by A)$20 billion. B)less than $20 billion. C)more than $20 billion. D)None of the above is correct.This policy shifts the long-run aggregate supply curve.

Figure 12.12 Alt text for Figure 12.12: In figure 12.12, a graph depicting the changes in aggregate demand. Long description for Figure 12.12: The x-axis is labelled, real GDP (trillions of 2007 dollars), and the y-axis is labelled, price level (CPI).2 lines are shown; AD1 and AD2.Line AD1 begins at the top left corner and slopes down to the bottom center.Line AD2 follows the same slope as line AD1, but is plotted to the right.Point A is plotted approximately 3 quarters of the way along line AD1.Point B is plotted less than half way along line AD2.Points A and B are connected to the y-axis with a line, and the area between lines AD1 and AD2 is indicated by a right pointing arrow. -Refer to Figure 12.12.If government purchases increase by $10 billion and lead to an ultimate increase in aggregate demand as shown in the graph above, the difference in real GDP between point A and point B will be A)$10 billion. B)less than $10 billion. C)more than $10 billion. D)There is insufficient information given here to draw a conclusion.

Figure 12.13 Alt text for Figure 12.13: In figure 12.13, a graph depicting the shift in aggregate demand. Long description for Figure 12.13: The x-axis is labelled, real GDP (trillions of 2007 dollars), and the y-axis is labelled, price level (CPI).3 lines are shown; AD1, AD2, and SRAS.Line AD1 begins at the top left corner and slopes down to the bottom center.Line AD2 follows the same slope as line AD1, but is plotted to the right.The area between lines AD1 and AD2 is indicated by a right pointing arrow.Line SRAS intersects line AD1 at point A, more than half way along line AD1.Line SRAS intersects line AD2 at point B, less than half way along line AD2. -Refer to Figure 12.13.An increase in government purchases of $20 billion causes aggregate demand to shift ultimately from AD₁ to AD₂.The difference in real GDP between point A and point B will be ________ $20 billion. A)equal to B)less than C)greater than D)There is insufficient information given here to draw a conclusion.

Cutting taxes A)will lower disposable income and lower spending. B)will raise disposable income and lower spending. C)will lower disposable income and raise spending. D)will raise disposable income and raise spending. E)will raise disposable income and raise net exports.

The tax multiplier A)is negative. B)is larger in absolute value as compared to the government spending multiplier. C)is a measure of how much taxes will fall when income is falling. D)is always less than one. E)increases with the size of the economy.

A cut in tax rates affects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect. A)decreasing; increasing B)decreasing; decreasing C)increasing; increasing D)increasing; decreasing

If the federal government wanted to counteract the effects of a recession, it could A)increase tax rates. B)increase taxes by a fixed amount. C)increase government purchases. D)decrease defense spending. E)reduce the money supply.

An equal increase in government purchases and taxes will cause A)an increase in real GDP. B)no change in real GDP. C)an increase in the budget surplus. D)a reduction in cyclically adjusted budget surplus. E)a reduction in interest rates.

Suppose real GDP is $1.7 trillion, potential real GDP is $1.8 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level, the federal government would need to increase government purchases by A)$100 billion. B)less than $100 billion. C)more than $100 billion. D)None of the above is correct.The federal government must decrease government purchases in this case.

Suppose real GDP is $1.7 trillion, potential real GDP is $1.75 trillion, and the federal government plans to use fiscal policy to restore the economy to potential real GDP.Assuming a constant price level, the federal government would need to decrease taxes by A)$50 billion. B)less than $50 billion. C)more than $50 billion. D)None of the above is correct.The federal government should raise taxes in this case.