Question

1. The intended goal of expansionary fiscal policy is:

A. an increase in interest rates

B. an increase in the price level

C. a reduction of distribution of income inequality

D. an increase in the level of aggregate output

2.If we assume that there are 100 households in the economy and that total income to be distributed across those households is $4000 (per day) and if the 20% poorest households earn $15 per day and the 60% middle income households earn $25 per day, what is the cumulative income earned by the RICHEST 20% of households?

A. $1800 or 45%

B. $1500 or 37.5%

C. $300 or 7.5%

D. $2200 or 55%

3.If planned aggregate expenditure (PAE) in an economy equals 600 + .8Y and potential output (Y*) equals 4000, then this economy has:

A. an expansionary gap

B. a recessionary gap

C. no output gap

D. no exogenous expenditure

4. If short-run equilibrium output equals 7 000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9000, then government purchases must ________ to eliminate any output gap.

A. decrease by 2000

B. increase by 200

C. increase by 2000

D. decrease by 200

5. When PAE = 300 +.4Y, short-run equilibrium output equals:

A. 300

B. 400

C. 500

D. 600

Answer 1

Solution (1):-

The intended goal of expansionary fiscal policy is an increase in the level of aggregate output.

Expensionary fiscal policy is the most effective tool of promoting economic activity during the period of recession. In recession period demand is low therefore government use fiscal policy tools like tax cut or increasing government spending to increase demand in the economy by giving more disposable income to the people.

Therefore Option (D) is correct.