Question

1. Holding everything else constant, the multiplier effect of a $100 tax cut :

a)is the same as the multiplier effect of a $100 increase in G.

b)is smaller than the multiplier effect of a $100 increase in G.

c)is larger than the multiplier effect of a $100 increase in G.

d)may be smaller than, larger than, or equal to the multiplier effect of a $100 increase in G.

2. When the government borrows funds in financial markets to pay for budget deficits and interest rates rise as a result:

A)planned aggregate spending decreases rather than increases.

B)Crowding out enhances the multiplier effect of higher government purchases on Y*.

C)Crowding out weakens the multiplier effect of higher government purchases on Y*.

3.As GDP falls, the government budget balance automatically

a.deteriorates as tax revenues shrink and transfer payments grow.

b.improves as tax revenues rise and transfer payments shrink.

c.balances itself out through the economy’s self-correcting mechanism.

d.Deteriorates as tax revenues grow and transfer payments shrink.

4. Contractionary fiscal policy:

a)is most helpful for restoring an economy to potential GDP when there is a recessionary gap.

b)shifts the AD curve to the right, restoring the equilibrium level of output to the potential output level for the economy.

c)often causes inflation or an increase in the aggregate price level.

d)shifts AD to the left, resulting in a reduction real GDP and a reduction in the aggregate price level.

5. Which of the following statements is true? Holding everything else constant:

a)when SRAS intersects AD to the right of the long-run aggregate supply (LRAS) curve, the economy faces an inflationary gap.

b)when SRAS intersects AD to the right of the long-run aggregate supply (LRAS) curve, the economy faces a recessionary gap.

c)an economy can eliminate an inflationary gap by increasing government spending.

d)expansionary fiscal policy refers to an increase in taxes.

6. In the short run, a larger federal budget surplus

A) only occurs when there is a deficit in the balance of trade.

B) creates inflation.

C)   increases aggregate demand.

D)   shifts the Long Run Aggregate Supply (LRAS) curve to the right.

E) decreases the equilibrium level of output and employment.

7.A cyclically adjusted budget balance:

A)shows what the budget balance would be with a significant amount of cyclical unemployment.

B)is an estimate of what the budget balance would be if real GDP were equal to potential output.

C)is a good indicator of the structural deficit that exists in the economy.

D)is the same as the national debt, and it rises as interest cost is accrued.

Answer 1

1.
b)is smaller than the multiplier effect of a $100 increase in G.
The tax multiplier is less than the government multiplier since taxes only increase the disposable income whereas the government multiplier affects aggregate demand.
2.
b)Crowding out enhances the multiplier effect of higher government purchases on Y*.
The government borrows funds from the market such that it pushes up the interest rates and crowds out the private sector.
3.
As GDP falls, the government budget balance automatically
a.deteriorates as tax revenues shrink and transfer payments grow.
4.
d)shifts AD to the left, resulting in a reduction real GDP and a reduction in the aggregate price level.
A contractionary fiscal policy shifts the AD curve to the left given an AS curve and leads to a reduction in the price level.

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