Economics 252 – Review Questions Chapter 11 – Fiscal Policy

(1) Fiscal policy options to stimulate the economy include:

(a) an increase in transfer payments.

(b) an increase in taxes.

(c) a decrease in government spending on goods and services.

(d) all of the above.

(2) The GDP gap will differ from the AD shortfall when:

(a) the multiplier effect raises spending.

(b) the aggregate supply curve (AS) slopes upward.

(c) the AS curve is horizontal.

(d) all of the above.

(3) Suppose the consumption function is C = 100 + 0.90 Y. If the government stimulates the economy with $50 billion in increased government purchases, aggregate spending or demand would rise by:

(a) $50 billion.

(b) $450 billion.

(c) $500 billion.

(d) $400 billion.

(4) If the MPC equals 0.80, a $100 billion tax increase will reduce consumption in he first round by:

(a) $20 billion.

(b) $80 billion.

(c) $100 billion.

(d) $500 billion.

(5) If the MPC for an economy is 0.90, a $5 billion increase in taxes will ultimately cause consumption to decrease by:

(a) $50 billion.

(b) $45 billion.

(c) $10 billion.

(d) $5 billion.

(6) Assume the MPC is 0.75, taxes increase by $100 billion, and government spending increases by $100 billion. Aggregate demand will:

(a) increase by $400 billion.

(b) decrease by $400 billion.

(c) increase by $100 billion.

(d) not change.

Utilize Figure 1 in answering Questions (7), (8), (9), and (10).

Figure 1

(7) In Figure 1, given the current aggregate demand in the economy is AD(1), and full employment real output is Q(F), the economy confronts a real GDP gap of:

(a) $0.1 trillion.

(b) $0.2 trillion.

(c) $0.3 trillion.

(d) $0.4 trillion.

(8) In Figure 1, given current aggregate demand at AD(1), the equilibrium level of output is:

(a) $5.8 trillion.

(b) $5.9 trillion.

(c) $6.0 trillion.

(d) $6.2 trillion.

(9) In Figure 1, given current aggregate demand at AD(1), if the MPC is 0.75, the fiscal stimulus needed to reach full employment is:

(a) $0.1 trillion.

(b) $0.2 trillion.

(c) $0.3 trillion.

(d) $0.4 trillion.

(10) In Figure 1, given current aggregate demand is at AD(1), the aggregrate demand shortfall is:

(a) $0.1 trillion.

(b) $0.2 trillion.

(c) $0.3 trillion.

(d) $0.4 trillion.

Utilize Figure 2 in answering Questions (11) and (12).

Figure 2

5.2 5.6 6.0 Real Output

(Q(F) (trillions of dollars)

(11) In Figure 2, the current level of Aggregate Demand is AD(1), and full employment real output is Q(F). The economy confronts a negative GDP gap of:

(a) $0.2 trillion.

(b) $0.4 trillion.

(c) $0.6 trillion.

(d) $0.8 trillion.

(12) In Figure 2, the current level of Aggregate Demand is AD(1). If Aggregate Demand decreases by the amount of the GDP gap, the equilibrium would occur at:

(a) point a.

(b) point b.

(c) point c.

(d) point d.