Question

1) According to new classical economists the reason that a tax cut does not shift the aggregate demand curve is:

a. real GDP does not chance because prices are inflexible.

b. households increase their consumption and can pay higher taxes in the future.

c. consumers anticipate the effect of an increase in government debt on future taxes.

2) ________ will often cause monetary policy to be considered counterproductive because it makes it hard for the central bank to know when the policy will take effect.

a. Long and variable time lags

b. Altering the discount rate

c. Reserve requirements

3) From a neoclassical perspective, when the economy is in a recession if the government increases its spending it is

a. with minimal risk of crowding out private investment.

b. without a need to rely on the expenditure multiplier effects.

c. at the risk of crowding out private investment.

4) If inflation is decreasing what is likely happening along a Keynesian Phillips curve?

a. A slight increase in unemployment.

b. A slight increase in aggregate demand.

c. A slight decrease in unemployment.

Answer 1

Ans 1. Option c

If the tax cut is financed by government borrowing then consumers will anticipate an increase in taxes in future, so, overall income throughout the life of the consumer remains unchanged, so, consumption and hence, aggregate demand does not rise.

Ans 2. Option a

The time lags can vary from 6 months to two years and are not fixed, so, it makes it difficult for central bank to estimate the effect of monetary policy after this long time period.

Ans 3. Option c

The increase in government expenditure will invrease the market interest rate and thus, cause crowding out of private investment.

Ans 4. Option a

An economy faces a trade off between unemployment and inflation in short run, so, a decrease in inflation will increase Unemployment.