Question

1. A. A major recession is looming. Turning to discretionary fiscal policy, Congress might vote to __________(what?)________________?

B. The economy is at very low unemployment rates and inflation rates are increasing. Turning to discretionary fiscal policy, Congress might vote to _____________(what?)___________________.

2. If Government Spending increases by $100 B and we're operating on the flat ("Keynesian") range of Aggregate Supply, will real GDP increase by (a) less than $100B, (b) $100 B, or (c) more than $100 B? (a multiple choice question)

3. In Paynia the marginal propensity to consume is .6. Times are tough and the economy is operating on the flat ("Keynesian") range of the Aggregate Supply Curve. If Congress wished to increase Aggregate Demand by $500 B, how much would it need to raise Government Spending, all else constant?

Answer 1

1A) lncrease government spending and cut taxes

( It's the remedy for a recession . By increasing the spending and cutting the taxes government will be able to rise aggregate demand.)

B) Decrease the government spending and Increase the taxes

( It will help to decrease the aggregate demand. Prices will fall.)

2) More than $100 B.

( Flat range is the Keynesian range. At this phase, economy will be going through severe depression. Monetary policy will be ineffective. Prices won't rise. So real income will rise more than $100 B.)

3) $ 200 B

( Increase in aggregate demand = Multiplier * Increase in government Expenditure

Multiplier = 1/1-mpc = 1/1-0.6= 1/0.4= 2.5

500 B = 2.5* Increase in government spending

Increase in government spending = 500/2.5= 200)