Question

1. Fiscal policy primarily affects macroeconomic equilibrium in the economy by

Select one:

a. changing the Short-Run Aggregate Supply

b. changing the Aggregate Demand

c. changing the Long-Run Aggregate Supply

d. all answers are correct

2. Suppose that the real GDP is $14 trillion, potential GDP is $16 trillion and taxes were cut by 500 billion to bring economy to the full employment. The implied value of the tax multiplier is

Select one:

a. 2

b. -4

c. 1.6

d. None of these options is correct. Taxes should be increased in this case.

3. Monetary policy primarily affects macroeconomic equilibrium in the economy by

Select one:

a. Changing both the Aggregate Demand and Long-Run Aggregate Supply

b. changing the Aggregate Demand

c. changing the Short-Run Aggregate Supply

d. changing the Long-Run Aggregate Supply

4. A decrease in real GDP

Select one:

a. has no effect on the demand for money

b. decreases the demand for money because there are fewer goods and services to purchase

c. increases the demand for money because of lower inflation that follows decrease in real GDP

d. increases the demand for money because there are fewer goods and services to purchase

Answer 1

1. Aggregate demand

Reason: Fiscal policy works by changing taxes or government expenditure, both of which affect consumer purchasing power and thus AD

2. -4

Reason: Tax multiplier = Change in GDP/Change in T

Tax multiplier = (16000-14000) / -500

Tax multiplier = 2000/-500

Tax multiplier = -4

3. Changing Aggregate demand

Reason: Monetary policy works by affecting money supply in the economy, which affects consumer income and thus aggregate demand

4.b. decreases the demand for money because there are fewer goods and services to purchase

Reason: A decrease in Real GDP reduces total goods and services in the economy to be purchased, leading to lower demand for money