Question

A decrease in tax rates

has no effect on the AD curve.

causes the AD curve to shift left.

causes the AD curve to shift right.

has only a short-term effect on real GDP.

usually leads to a reduction in potential GDP.

2.

To reduce the size of economic fluctuations, the government could

make fewer permanent changes in government spending.

change government purchases often to encourage a shift of the aggregate demand curve.

increase spending during a recession and decrease spending during an expansion.

keep government spending fixed to avoid shifting the aggregate demand curve.

continually increase government spending to shift the aggregate demand curve to the right.

3.

Countercyclical fiscal policy is risky because

it tends to increase the national debt.

real GDP is likely to be close to potential GDP by the time the policy takes effect.

it tends to have no effect on unemployment.

it tends to make recessions more severe.

it tends to result in higher inflation.

Answer 1

1) A decrease in tax rates - will shift the AD curve to the right as people will have more moeny at their disposal so the quantity demanded increases.

2)To reduce the size of economic fluctuations,the government could - increase spending during a recession and decrease spending during an expansion.

3)Countercyclical fiscal policy is risky because- real GDP is likely to be close to potential GDP by the time the policy takes effect. Countercyclical fiscal policy reduces spending and raises taxes during a boom period and increases spending and cut taxes during a recession.