Question

Assume that there is a recessionary gap in Shadowland. The government of Shadowland might eliminate the gap by doing all of the following except

	an increase in government spending.
	a decrease in personal taxes.
	an increase in reserve requirement.
	an decrease in discount rate.
	an open market purchase.

Assume disposable income for an economy is $10,000, consumption is $7,500, and the marginal propensity to save (MPS) is .25. If disposable income increases by $1,000, what is the amount of consumption in this economy?

	$7,500
	$8,250
	$8,500
	$10,000
	$11,000

If the government wants to increase spending on public works by $100 billion to stimulate the economy without increasing inflation, it would

	decrease taxes by $100 billion.
	increase taxes by $100 billion.
	decrease taxes by less than $100 billion.
	increase taxes by less than $100 billion.
	increase taxes by more than $100 billion.

In an economy with a horizontal aggregate supply curve, a decrease in taxes will affect price level and employment in which of the following ways?

Price Level / Employment

	Decrease / Increase
	Increase / Increase
	Increase / Decrease
	Increase / No Change
	No Change / Decrease
	No Change / Increase

A decrease in LRAS might indicate that

	consumers were spending more money.
	labor productivity fell.
	there was less variety of goods.
	consumers were spending less money.
	net exports decreased.

Answer 1

a) "C"

An increase in the reserve ration will result in more recession as the money supply will decrease.

b) With an increase of income by every dollar the consumption will increase by 0.75, an increase in the income of 1000 will result in an increase in the consumption of 750. Answer is "B".

c) "E"

As the tax multiplier is less than the government expenditure multiplier the tax should be more than $1000 billion.

d) "D"

it will increase the price but not increase the employment as the output is non elastic.

e) "B"

Low labor productivity will decrease the output.