2. Employment Act of 1946 1. With the Employment Act of 1946, the federal government committed itself to accept (total/some) degree of responsibility for employment/prices. Fiscal policy 2. Fiscal policy is carried out primarily by the (local/state/federal ) government. Discretionary fiscal policy 3. Discretionary fiscal policy [G & T] (does/does not) require congressional action. mixedclosed economy 4. In a mixed [private & public) closed economy, taxes & (savings/government spending) leakages injections are leakages, while Ig and (savings/government spending) are injections. mixedeconomy 5. In a mixed economy, the equilibrium GDP exists where (C+Ig/C+Ig+G+Xn)=GDP. balanced budget multiplier 6. The balanced budget multiplier indicates that equal increases in G&T tend to (decrease/increase/not change) the equilibrium GDP. [M BB is “1”] equilibrium GDP is $400 billion 7. Assume in a private economy that equilibrium GDP is $400 billion & the MPC is G collects new taxes of $50 bil.spends the entire amount.80. Suppose the G collects new taxes of $50 bil. & spends the entire amount on our infrastructure. As a result equilibrium GDP will be ($400/$450/$500) bil. constitutional amendmentG always balance 8. Suppose a constitutional amendment requires that the G always balance its budgetincrease GDP by $40 billion its budget. If it desired to increase GDP by $40 billion, G should (increase/decrease) government spending & taxes by ($30/$40/$50) billion.

3. F.E. GDP is OC 12. If the F.E. GDP is OC, then it would be appropriate fiscal policy for “G”“T” government to (increase/decrease) “G” and (increase/decrease) “T”. F.E. GDP is OA 13. If the F.E. GDP is OA, then it would be appropriate fiscal policy for “G”“T” government to (increase/decrease) “G” and (increase/decrease) “T”. eliminate a budget deficit during a depression 10. If the government tries to eliminate a budget deficit during a depression, these efforts will (help/hurt) the depression. conservative economist 11. A conservative economist who advocates an active fiscal policy taxrecession would recommend tax (increases/decreases) during a recession and government spendinginflation (increases/decreases) in government spending during inflation. severe recession 9. In a severe recession, Keynesians would favor a(n) (increase/decrease) in taxes. YIYIYIYI CA AE 1 AE 2 PL Y R Y* Y R Y* 800 ? AE PL O YRYRYRYR S

4. during a recession 14. If G increases its spending during a recession to assist the economy, the funds must come from some source. (Additional taxes/Borrowing from the public/Creating new money) most expansionary would tend to be the most expansionary. fiscal actions 15. The following fiscal actions, ( incurring a budget surplus and allowing it to accumulate as idle Treasury balances/ incurring a budget surplus which is used to retire debt held curbing inflation by the public) is likely to be most effective in curbing inflation. greatest anti-inflationary impact of a budget 16. The greatest anti-inflationary impact of a budget surplus surplus will occur when the G (impounds/uses) the surplus funds & lets them (stand idle/pay off the debt). built-in stabilizers 17. In describing the built-in stabilizers, we can say that personal & corporate income tax collections as GDP increasestransfers automatically (incr/decr) as GDP increases & transfers and subsidiesas GDP increases and subsidies (incr/decr) as GDP increases. Should I give it back?

5. Answer the next 3 questions(18-21) based on the diagram. Deficits 18. Deficits will be realized at GDP levels (below/above) C, and surpluses surpluses (below/above) C. F.E. GDPDF.E. budget 19. If the F.E. GDP for the economy is at D, the F.E. budget will entail a (deficit/surplus). tax line had a greater slope 20. If the tax line had a greater slope [more progressive tax system], stability stability would be (less/greater). adhered strictly to an annually balanced budget 21. If government adhered strictly to an annually balanced budget then the government’s budget would tend to (destabilize/stabilize) the economy. T2T2 1

6. For Questions 22-24 [graph] 22. (T1/T4) tax system is characterized least built-in stability by the least built-in stability. 23. (T1/T4) tax system is characterized most built-in stability by the most built-in stability. 24. (T1/T4) tax system will generate the largest cyclical deficits largest cyclical deficits. Nondiscretionary 25. Nondiscretionary Fiscal Policy (does/does not) require congressional action. $10 B increase in “G”increase “C” 26. If the MPC is.5, a $10 B increase in “G” will increase “C” not income [not income] by ($20/$10/$5) billion. [G increase in spending of $10 B increases income (Y) by $20 B. With MPC of.5, C increases $10 B] government tries to give back a surplusduring an inflationary 27. If government tries to give back a surplus during an inflationary FE year FE year, this will be (pro-cyclical/counter-cyclical). improvement 28. When politicians use fiscal policy to cause an improvement in the economy just prior to an election in the economy just prior to an election, this is called a (presidential/Congressional/political) business cycle. G incurs a deficit which is financed by borrowing 29. When G incurs a deficit which is financed by borrowing, interest rates to increase which decreases Ig causing interest rates to increase which decreases Ig, this is called the (crowding-in/crowding out) effect. Supply-sidersprimary effect of tax cuts 30. Supply-siders argue that the primary effect of tax cuts is to shift the AS curve (leftward/rightward).

7. MPS is.2 34. If the MPS is.2 and the economy has a recessionary spending gap of $5 billionequilibrium billion, we may conclude that the equilibrium level of GDP level of GDP is ($5/$20/$25) below the FE GDP. MPS is.2 33. In a private-closed economy, the MPS is.2, consumption equals income at $200 billioninvestment is $10 billion, and the level of investment is $10 billion billion. The equilibrium level of income at the new level is ($200/$250) billion. MPC is.8$2 billion increase in “G” 31. If the MPC is.8, a $2 billion increase in “G” will increase “consumption” “consumption” by ($10/$8/$6) billion. [When G increases by $2 billion, Y does increase by $10, but *8 (80%) is consumed, or $8 billion] MPC is.9$1 billion increase in “G” 32. If the MPC is.9, a $1 billion increase in “G” will increase “consumption” “consumption” by ($10/$9/$8) billion. C+Ig 200 200 ? “C” +$10 Ig AE AE1 AE2 Y R ? AE +$5 S S

8. government decreases G&T by $10 billion 36. If the government decreases G&T by $10 billion, then a MPS of.10 equilibrium GDP MPS of.10, the equilibrium GDP would (increase/decrease) by ($5/$10/$100) billion. MPC of.75Government increases G&T by $8 billion 37. With a MPC of.75, Government increases G&T by $8 billion. equilibrium GDP The equilibrium GDP (increases/decreases) by ($75/$32/$8) billion. government runs a budget surplus and desires to 38. If the government runs a budget surplus and desires to curb inflation curb inflation, it should (give the surplus back/keep it in storage). MPS is.5 35. If the MPS is.5 and the economy has an inflationaryspending gap of $6 billion inflationary spending gap of $6 billion, equilibrium level we may conclude that the equilibrium level of GDP of GDP is ($6/$12/$18) billion above the FE GDP. NS 35 - 38 -$6 AE1 AE2 Y* Y I AE S

9. Expansionary fiscal policyeffective 1. Expansionary fiscal policy will be most effective AS curve is [increase GDP] when the AS curve is (vertical/horizontal) & (incr/decr) “C” and (incr/decr) unemployment. paradox of thrift 2. The paradox of thrift indicates that an increase in saving (matched/ unmatched) by an increase in investment will lower equilibrium GDP. contractionary fiscal policydecr G, incr T 3. A contractionary fiscal policy [decr G, incr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. expansionary fiscal policyincr G, decr T An expansionary fiscal policy [incr G, decr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. AE[AD]doesn’t buy up FE output(GDP) 4. In the AE model, if AE[AD]doesn’t buy up FE output(GDP), then the equilibrium output is (less than/more then) full employment output. [G ; LFM ; In. Rates ] G $2 Tr. T $2 Tr. [On #3, start from a balanced budget] “Recessionary Gap” “Inflationary Gap”

10. decrease AD the greatest amount 5. To decrease AD the greatest amount, the government should: (decrease “G” only/increase “T” only/both decr G & incr T) 6. To increase AD the greatest amount, the “G” should: (increase “G” only/ decrease “T” only/both incr G and decr T) recessionary gap equilibrium point[actual GDP] 7. In a recessionary gap (AE model) at the equilibrium point[actual GDP] planned investmentsaving,FE planned investment is (greater than/equal to/less than) saving, but at the FE GDP levelsaving GDP level, planned investment [backup ] is (greater than/equal to/less than ) saving. inflationarygapAE model 8. In an inflationary gap(AE model), at the equilibrium point [actual GDP] planned investment [backup] is (greater than/equal to/less than) saving, but at the FE level, planned investment is (greater than/equal to/less than) saving. unplanned increase in inventories 9. If businesses are experiencing an unplanned increase in inventories, AE is FE output & spending (less than/greater than) FE output & spending will (increase/decrease). unplanned decrease in inventoresdisinvestment 10. If businesses are experiencing an unplanned decrease in inventores [disinvestment] FE output & spending AE is (less than/greater than) FE output & spending will (increase/decrease).

11. “C” equals income at $500 billionMPC is.9 11. If “C” equals income at $500 billion, & MPC is.9, then an increase in Ig of $10 billion will change equilibrium GDP to ($400/$490/$510/$600) billion. conservative economist 12. A conservative economist would want tax (incr/decr) during recessioninflationary times a recession & (incr/decr) in “G” during inflationary times. liberal economist 13. A liberal economist would want tax (incr/decr) during an inflationrecessionary periods inflation & (incr/decr) in “G” during recessionary periods. inflationary gap 14. An inflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP. recessionary gap 15. A recessionary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP. increase GDP[but reduce military spending] 16. To increase GDP[but reduce military spending], we would combine two (domestic/overseas) bases into one (domestic/overseas) base. tax cut to expand the economy 17. A tax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates. tax increase to contract the economy 18. A tax increase to contract the economy would (incr/decr) Y & (incr/decr) IR. 500 500

12. increase equilibrium GDP by $400,000 19. To increase equilibrium GDP by $400,000, with a MPC of.5, a Keynesian economist would ( decrease “T” /increase “G” ) by $ 200,000. equilibrium GDP is $500 billion 20. Assume equilibrium GDP is $500 billion & MPS is.4. “G” collects taxes of of $22 billion and spends Now “G” collects taxes of of $22 billion and spends the entire amount the entire amount. As a result, equilibrium GDP will change to: ($445/$478/$522/$555). MPC of.5$12 billion 21. With a MPC of.5, a $12 billion increase increase “C” in “G” will increase “C” by ($12/$24/$36) bil. MPC of.5 22. With a MPC of.5 and the economy in a recessionary spending gap of $12 billion recessionary spending gap of $12 billion, we may conclude that the equilibrium is short of FE GDP ($12/$24/$36) billion short of FE GDP.

13. increase in Ig of $25 billion 23. An increase in Ig of $25 billion results in an increase in equilibrium income (GDP) of $50B, so the MPS is? contractionary fiscal policy 24. A contractionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. Increasing T or decreasing G 25. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment..5inflationaryGDP Gap$50BGinflationaryGDP Gap reducing government spending 26. With a MPC of.5, and the economy with an inflationary GDP Gap of $50B, G could eliminate this inflationary GDP Gap by reducing government spending by? MPC of.5current output at $500 bil. but FE output is $700 bilcorrect fiscal policy 27. With a MPC of.5 and current output at $500 bil. but FE output is $700 bil., correct fiscal policy would be to (increase G/decrease T) by $100 billion. [Incr T or Decr G].5 $25 bil.

14. increase in Ig 28. An increase in Ig in an economy (increase)/decrease) GDP & (increase/decrease) C. recessionary economy 29. In a recessionary economy, at FEGDPsavingIg FE GDP, saving is (less than/more than) Ig. recessionary economy 30. In a recessionary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). mixed-closed economyno Xnleakages 31. In a mixed-closed economy (no Xn), the leakages are? injections and the injections are? inflationary Gap 32. If the economy has an inflationary Gap, at FE GDPsaving FE GDP, saving (exceeds/is less than) Ig. equal increase in G & T of $25 bil 33. If there is an equal increase in G & T of $25 bil., outputinterest rates then output will (increase/decrease) & interest rates [based on PL] [based on PL] will (increase/decrease). [S & T] [G & Ig]

15. Review for AE & Fiscal Policy “Econ, econ”

16. The M E, M T, & M BB Multipliers M E [G, Ig, or Xn] = 1/MPS = 1/.25 = 4 G increase of $20 bil.incr Y by $80 bil.$20x4=$80 So, G increase of $20 bil. will incr Y by $80 bil. [$20x4=$80] G decrease of $20 bil.decrease Y by $80 bil. - $20x4= - $80 bil. And a G decrease of $20 bil. will decrease Y by $80 bil. [ - $20x4= - $80 bil.] M T = MPC/MPS =. 75/.25 = 3 T decreaseof $20 bil.incr Y by $60 bil.$20 x 3=$60 So, T decrease of $20 bil. will incr Y by $60 bil. [$20 x 3=$60] T increase of $20 bil. - $20x3= - $60 And a T increase of $20 bil. will decr Y by $60 bil. [ - $20x3= - $60] M BB = 1 increase in G&T of $20 bil.incr Y by $20 bil.20x1= $20 So, an increase in G&T of $20 bil. will incr Y by $20 bil. [$20x1= $20 ] decrease in G&T of $20 bil.decr Y by $20 bil. - 20x1= - $20 A nd a decrease in G&T of $20 bil. will decr Y by $20 bil.[ - $20x1= - $20] increase in expenditures x theM will increase GDP Any increase in expenditures x the M will increase GDP. decrease in expenditures x the M will decrease GDP Any decrease in expenditures x the M will decrease GDP.

17. AE [ C + Ig ] AE [ C + Ig ] (billions of dollars) o 45 o C onsumption C + I g I g = $20 Billion Equilibrium Real domestic product, GDP (billions of dollars) 390 470 370 390 410 430 450 470 490 510 530 550 Equilibrium GDP after $20 bil. Ig [MPC=.75] AE[C+Ig] [“Basic” or “Simple” economy] C =$450 Billion $530 510 490470 450 430 410390 370 + 20 Ig +80 S Private Closed

18. AE [C+Ig+Xn] AE [C+Ig+Xn] (billions of dollars) o 45 o C onsumption C + Ig+Xn I g = $20 Billion Equilibrium Real domestic product, GDP (billions of dollars) 390470 370 390 410 430 450 470 490 510 530 550 450 20 1010 GDP [470] ) (C [450] + I g[20] +M [10] + X [10] = GDP [470] ) Equilibrium GDP after X of $10 & M of $10 C = $450 Billion $530 510 490470450 430 410390 370 S Private Open

19. ADDING THE PUBLIC SECTOR [“G”] AE (billions) o 45 o Real domestic product, GDP (billions of dollars) 390 470 Consumption C + I g + X n C + I g + X n + G Government Spending of $20 Billion $20 Billion Government Purchases and Equilibrium GDP S Mixed - Open Private-public - ROW $20 bil. on N ational D efense 550 Increases Y by $80 [$20 x 4 = $80] $390 $470 $550

20. -20 x 3 = -$60 ADDING THE PUBLIC SECTOR [“G”] Incr. T by $20 billion [MT = 3] E quilibrium GDP[-60] o 45 o Real domestic product, GDP (billions of dollars) $550 C + I g + X n + G C a + I g + X n + G $490 S Mixed-Open $20 bil. incr in T $490 $550

21. Gonna have to borrow B alanced B udget [$2 T ril. “G” = $2 T ril. “T”] $2 Trillion G T Recession Incr G to $2.2 or or Decr T to $1.8 Deficit so higher I.R. Inflation Decr G to $1.8 or Incr T to $2.2 Surplus so Lower I.R. Budget So expansionary fiscal policy leads to higher interest rates. Deficit Wow! A surplus So, contractionary fiscal policy leads to lower interest rates.

22. increase in Ig of $75B $300B 1. An increase in Ig of $75B results in an increase in equilibrium income(GDP) of $300B, so the MPS is? expansionary fiscal policy 2. An expansionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. Increasing T or decreasing G 3. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment. MPC of.75 inflationaryGDP Gap$80B inflationary equilibrium GDP Gapreducing government spending 4. With a MPC of.75, and the economy with an inflationary GDP Gap of $80B, G could eliminate this inflationary equilibrium GDP Gap by reducing government spending by? MPC of.60current output at $650 bil. but FE output is $700 billion 5. With a MPC of.60 & current output at $650 bil. but FE output is $700 billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion..25 $20 bil. [Decr T or Incr G] $2 Tr. G T

23. increase in Ig 6. An increase in Ig in an economy will GDPC (incr)/decr) GDP and (incr/decr) C. recessionary economy 7. In a recessionary economy, at FE GDPsaving FE GDP, saving is (less than/more than) Ig. inflationary economy 8. In an inflationary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). complex economy C+Ig+G+Igleakages 9. In the complex economy (C+Ig+G+Ig), the leakages are? injections and the injections are? inflationary Gapat 10. If the economy has an inflationary Gap, at FE GDP FE GDP, saving (exceeds/is less than) Ig. equal increase in G & T of $ 10 bil 11. If there is an equal increase in G & T of $ 10 bil., then output will (incr/decr) & interest rates will (incr/decr). [S, T, & M] [G, Ig, X]

24. “OT”consumption 1. At income level “OT”, the volume of consumption is _____. “OT”saving 2. At income level “OT”, the volume of saving is _____. “APC”“1” 3. The “APC” is equal to “1” at income level _____. Ig1“equilibrium GDP” 4. If Ig is Ig1, then “equilibrium GDP” is _____. Ig2“equilibrium GDP” 5. If Ig is Ig2, then “equilibrium GDP” is _____. Ig1Ig2equilibrium GDP increases 6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____. Ig1Ig2“MPC” 7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________. OVOU“MPS” 8. As we move from income level OV to OU, the “MPS” is ________. “dissaving” 9. The economy is “dissaving” at income level _____. Consumption will be equal to income at income level 10. Consumption will be equal to income at income level _____. TC CF OV OU OT UT BC/UT AE / VU OW OV W V U T B 0 AE (C+Ig) AE (C+Ig2) AE (C+Ig1) Consumption F E D C Real GDP [Revised]45 G AS

25. The next 3 slides will get you ready for the AE Quiz Hard Quiz Ahead

26. 200 400 1,000 1,600 2,200 bil. 200 400 1,000 1,600 2,200 bil. 0 N Q K L M S $2,200 $1,600 $1,000 $700 $400 J P I H G E F A B C D AE 3 [C + I g+ G + X n ] AE 3 [C + I g+ G + X n ] AE 2 [C+Ig+G] AE 1 [C+Ig] Consumption Real GDP Inflat.Gap R ecess. Gap APC is “one” 1. The APC is “one” at letter: (J/H/G/A). Consumption will be equal to income(GDP) 2004001000 2. Consumption will be equal to income(GDP) at (200/400/1000). shift from AE 2 to AE 3 3. A shift from AE 2 to AE 3 would be caused by a[an] appreciationdepreciation (appreciation/depreciation) of the dollar. J to H, the simple multiplier 4. If there is a shift from J to H, the simple multiplier is: (2/3/4/5) FE GDP is OL & we are at AE 2 5. If the FE GDP is OL & we are at AE 2 then there is a(an): a. recessionary gap b. inflationary gap c. no gap FE GDP is OL & we are at AE 1recessinflatABBC 6. If the FE GDP is OL & we are at AE 1, the (recess./inflat.) gap is (AB/BC). $100 +300 AE[C+Ig+G+Xn]

27. 200 400 1,000 1,600 2,200 bil. 200 400 1,000 1,600 2,200 bil. 0 N Q K L M S $2,200 $1,600 $1,000 $700 $400 J P I H G E F A B C D AE 3 [C + I g+ G + X n ] AE 3 [C + I g+ G + X n ] AE 2 [C+Ig+G] AE 1 [C+Ig] Consumption Real GDP AE[C+Ig+G+Xn] Inflat.Gap R ecess. Gap FE GDP is OL [$1,600] and we are at AE 3 7. If the FE GDP is OL [$1,600] and we are at AE 3, the recessionaryinflationary (recessionary/inflationary) gap is: (BC or AB). equilibrium level of GDP at AE 3 $1,000$1,600$2,200 8. The equilibrium level of GDP at AE 3 is ($1,000/$1,600/$2,200). FE is OL [$1,600] & we are at AE1, correct fiscal policy 9. If FE is OL [$1,600] & we are at AE1, correct fiscal policy increasedecrease G incresedecrease T would be to ( increase / decrease ) “G” &/or ( increse / decrease ) “T”. FE is OL [$1,600] & we are at AE 3 10. If FE is OL [$1,600] & we are at AE 3, correct fiscal policy (increase/decrease) G (increase/decrease) T would be to (increase/decrease) “G” &/or (increase/decrease) “T”. OKsaving 11. At income level OK, the volume of saving is: ($300/$700/$1,000). dissaving 12. The economy is dissaving GDP level: ($200/$400/$600). +300 $100

28. FE GDP is OL and we are at AE1recessinflat 15. If the FE GDP is OL and we are at AE1, a (recess/inflat) gap, we can saving is less thanequals/exceeds conclude that at the equilibrium point, saving (is less than/equals/exceeds) FE level[$1,600], saving planned investment, but at the FE level[$1,600], saving planned investment (is less than/equals/exceeds) planned investment by (HI/GF). AE1[$1,000],G decreases both G & T by $400 billion 17. At AE1[$1,000], the G decreases both G & T by $400 billion to balance the budget. With a simple multiplier of 5, the GDP (increases/decreases) to ($600/$1,000/ $1,600/$1,800). AE1($1,000),G spends $500 billionincreases taxes 18. At AE1($1,000), the G spends $500 billion & increases taxes by $500 billionbalance the budget by $500 billion to balance the budget. With a simple multiplier increasesdecreases of 5 the GDP (increases/decreases) to ($500/$1,000/$1,500/$1,800). “J” to “H” 13. A shift from “J” to “H” MPC would result in a MPC of: (HK/OK or IP/QK or HI/OK) “J” to “H” 14. A shift from “J” to “H” MPS would result in a MPS of: (HK/OK or IP/QK or HI/QK) 15. A t AE1, consumption totals ($200/$300/$700). 200 400 1,000 1,600 2,200 bil. 200 400 1,000 1,600 2,200 bil. 0 N Q K L M S $2,200 $1,600 $1,000 $700 $400 J P I H G E F A B C D AE 3 [C + I g+ G + X n ] AE 3 [C + I g+ G + X n ] AE 2 [C+Ig+G] AE 1 [C+Ig] C AE[C+Ig+G+Xn] Inflat.Gap R ecess. Gap +300 $100

29. dissaving 1.T he economy is dissaving at a. 200 b. 400 c. 1,000 saving will be 2. Aggregate saving will be zero zero where GDP is a. $ 200 b. $ 400 c. $ 600 AE 1, savings totals 3. At AE 1, savings totals a. $300 b. $700 c. $1,000 FE GDP is OL 4. If the FE GDP is OL & we at AE 3 inflationary are at AE 3 the inflationary gap gap is a. BC b. AB c. CD FE GDP is OLat AE 1 5. If the FE GDP is OL & we are at AE 1 we can conclude that at FE GDP the FE GDP: a. “S” exceeds Ig by GF b. Ig exceeds “S” by GF J to HMPC 6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK AE 2 to AE 3 caused by 7. A movement from AE 2 to AE 3 would be caused by a(an) _______ of the dollar? A. appreciation b. depreciation FE GDP is OLat AE 1 recessionary gap is 8. If the FE GDP is OL & we are at AE 1 the recessionary gap is: a. AB b. BC c. CD Consumption is equal to GDP 9. Consumption is equal to GDP at: a. 200 b. $400 c. $600 AE 1 ($1,000 GDP) G increases G&T by $100 billion 10. At AE 1 ($1,000 GDP), G increases G&T by $100 billion. W ith a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200 Hard Quiz G $100 +300 1. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b

30. AE & Fiscal Policy Q uestions on 2000 AP E xam value of the spending multiplier 1. (81%) The value of the spending multiplier (M E ) decreases when a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases c. imports decline Keynesian recommend 2. (75%) Which of the following policies would a Keynesian recommend during high unemployment and low inflation a period of high unemployment and low inflation? a. decreasing the MS to reduce AD b. decreasing taxes to stimulate AD c. decreasing government spending to stimulate AS d. balancing the budget to stimulate AS equilibrium income will 3. (47%) Which of the following best explains why equilibrium income will increase by more than $100 in response to a $100 increase inG increase by more than $100 in response to a $100 increase in G? a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption. c. The increased spending raises the aggregate price level. d. The increased spending increases the money supply, lowering interest rates. e. The higher budget deficit reduces investment. Unexpected increases in inventories 4. (56%) Unexpected increases in inventories usually precede a. increases in inflationb. increases in importsc. stagflation d. decreases in productione. decreases in unemployment If MPS incr from.10 to.20, the M E would decrease from 10 to 5. more C The Multiplier ensures more C with each round.

31. economy on the right is 5. (63%) The economy on the right is experiencing currently experiencing a. inflation b. recession c. expansion d. stagflation e. rapid growth monetary policy 6. (77%) Correct monetary policy to reach FE GDP increase reach FE GDP is to increase a. the MS b. the RR c. discount rate d. taxes e. exports minimum increase in government 7. (36%) The minimum increase in government spending reach full employment spending to reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $100 simple Keynesian AE model[not AD/AS] 8. (58%) In the simple Keynesian AE model [not AD/AS] of an economy, changes in Ig or G lead to a change in which changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates d. the AS curve closed-privateAPC is.75true 9. (83%) In a closed-private in which the APC is.75, which of following is true? a. If income is $100, then saving is $75.d. If income is $200, then “C” is $75 b. If income is $100, then “C” is $50e. If income is $500, then saving is $100 c. If income is $200, then saving is $50Full.Employ. C C+IgAE $500 $400 0 $800 $1,000 $2,000 SE A Determine what the “M” is going from A to E; then M X ? = $1,000

32. DI is $1,000 consumption is $700 MPC is.6 10. (63%) Suppose that DI is $1,000, consumption is $700, and the MPC is.6. DI then increases by $100 If DI then increases by $100, consumption and savings will equal which of the following? ConsumptionSavings a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340 Fiscal Policy Questions from 2000 Exam Fiscal Policy Questions from 2000 Exam inflationary gap can be eliminated EXCEPT 11. (73%) An inflationary gap can be eliminated by all of the following EXCEPT a. an increase in personal income taxesd. a decrease in G b. an increase in the MSe. a decrease in Xn c. an increase in the interest rate advantage of automatic stabilizers 12. (56%) A major advantage of automatic stabilizers in fiscal policy is that they a. reduce the public debt b. increase the possibility of a balanced budget c. stabilize the unemployment rate d. go into effect without passage of new legislation e. automatically reduce the inflation rate If $700 of $1,000 DI is consumed, then saving is $300. MPC of.6 means if DI increases by $100, then $60 more will be consumed & $40(.4) more will be saved (40%). The $60 added to the $700 already consumed = $760 consumed and the additional $40 saved = $340 saved. Which answer does not slow the economy?

33. contractionary fiscal policyAD 13. (70%) In the short run, a contractionary fiscal policy will cause AD, outputprice level output, and the price level to change in which of the following ways? ADOutputPrice level a. decreasedecreasedecrease b. decreaseincreaseincrease c. increase decreasedecrease d. increaseincreaseincrease Crowding out 14. (52%) Crowding out due to government borrowing occurs when a. lower interest rates increase private sector investment b. lower interest rates decrease private sector investment c. higher interest rates decrease private sector investment d. a smaller money supply increases private sector investment G wants to increase its spending by $100 billion 15. (41%) If, at FE, the G wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following? a. raise taxes by more than $100 billion c. raise taxes by less than $100 b. raise taxes by $100 billion d. lower taxes by $100 billion expansionary monetary policies 16. (42%) Compared to expansionary monetary policies adopted to expansionary fiscal policies counteract a recession, expansionary fiscal policies tend to result in a. less public spendingc. a high rate of economic growth b. higher interest ratesd. lower prices