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1. With the Employment Act of 1946 , the federal government committed

Fiscal Policy Review Q's. 1. With the Employment Act of 1946 , the federal government committed itself to accept (total/some) degree of responsibility for employment/prices. 2. Fiscal policy is carried out primarily by the (local/state/federal ) government .

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1. With the Employment Act of 1946 , the federal government committed

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  1. Fiscal Policy Review Q's 1. With theEmployment Act of 1946, the federal government committed itself to accept (total/some) degree of responsibility for employment/prices. 2.Fiscal policyis carried out primarily by the(local/state/federal) government. 3.Discretionary fiscal policy[G & T] (does/does not) require congressional action. 4. In amixed[private & public)closed economy, taxes & (savings/government spending) areleakages, while Ig and (savings/government spending) areinjections. 5. In amixedeconomy, the equilibrium GDP exists where (C+Ig/C+Ig+G+Xn)=GDP. 6. Thebalanced budget multiplierindicates that equal increases in G&T tend to (decrease/increase/not change) the equilibrium GDP. [MBB is “1”] 7. Assume in a private economy thatequilibrium GDP is $400 billion& the MPC is .80. Suppose theG collects new taxes of $50 bil. & spends the entire amounton our infrastructure. As a result equilibrium GDP will be ($400/$450/$500) bil. 8. Suppose aconstitutional amendmentrequires that theG always balance its budget.If it desired toincrease GDP by $40 billion, G should (increase/decrease) government spending & taxes by ($30/$40/$50) billion.

  2. 9. In asevere recession, Keynesians would favor a(n) (increase/decrease) in taxes. AE2 PL AE1 YR Y* 800 ? 10. If the government tries toeliminate a budget deficit during a depression, these efforts will (help/hurt) the depression. 11. Aconservative economistwho advocates an active fiscal policy would recommend tax (increases/decreases) during arecessionand (increases/decreases) ingovernment spendingduringinflation. S AE PL C A O YI YR 12. If theF.E. GDP is OC, then it would be appropriate fiscal policy for government to (increase/decrease) “G” and (increase/decrease) “T”. 13. If theF.E. GDP is OA, then it would be appropriate fiscal policy for government to (increase/decrease) “G” and (increase/decrease) “T”.

  3. 14. If G increases its spending during a recession to assist the economy, the funds must come from some source. (Additional taxes/Borrowing from the public/Creating new money) would tend to be the most expansionary. 15. The following fiscal actions, (incurring a budget surplus and allowing it to accumulate as idle Treasury balances/ incurring a budget surplus which is used to retire debt held by the public) is likely to be most effective incurbing inflation. 16. The greatest anti-inflationary impact of a budget surplus will occur when the G (impounds/uses) the surplus funds & lets them (stand idle/pay off the debt). 17. In describing the built-in stabilizers, we can say that personal & corporate income tax collections automatically (incr/decr) as GDP increases & transfers and subsidies (incr/decr) as GDP increases. Should I give it back?

  4. T2 1 Answer the next 3 questions(18-21) based on the diagram. 18. Deficits will be realized at GDP levels (below/above) C, and surpluses (below/above) C. 19. If the F.E. GDP for the economy is at D, the F.E. budget will entail a (deficit/surplus). 20. If the tax line had a greater slope[more progressive tax system], stability would be (less/greater). 21. If government adhered strictly to an annually balancedbudget then the government’s budget would tend to (destabilize/stabilize) the economy.

  5. For Questions 22-24 [graph] 22. (T1/T4) tax system is characterized by the least built-in stability. 23. (T1/T4) tax system is characterized by the most built-in stability. 24. (T1/T4) tax system will generate the largest cyclical deficits. 25. Nondiscretionary Fiscal Policy (does/does not) require congressional action. 26. If the MPC is .5, a $10 B increase in “G” will increase “C” [not income] by ($20/$10/$5) billion. [G increase in spending of $10 B increases income (Y) by $20 B. With MPC of .5, C increases $10 B] 27. If government tries to give back a surplusduring an inflationary FE year, this will be (pro-cyclical/counter-cyclical). 28. When politicians use fiscal policy to cause an improvement in the economy just prior to an election, this is called a (presidential/Congressional/political) business cycle. 29. When G incurs a deficit which is financed by borrowing, causing interest rates to increase which decreases Ig, this is called the (crowding-in/crowding out) effect. 30. Supply-siders argue that the primary effect of tax cuts is to shift the AS curve (leftward/rightward).

  6. 31. If the MPC is .8, a $2 billion increase in “G” will increase “consumption” by ($10/$8/$6) billion. [When G increases by $2 billion, Y does increase by $10, but *8 (80%) is consumed, or $8 billion] 32. If the MPC is .9, a $1 billion increase in “G” will increase “consumption” by ($10/$9/$8) billion. S C+Ig AE 33. In a private-closed economy, the MPS is .2, consumption equals income at $200 billion, and the level of investment is $10 billion. The equilibrium level of income at the new level is ($200/$250) billion. “C” +$10 Ig 200 200? S AE2 34. If the MPS is .2 and the economy has a recessionary spending gap of $5 billion, we may conclude that the equilibrium levelof GDP is ($5/$20/$25) below the FE GDP. AE AE1 +$5 YR ?

  7. NS 35 - 38 S 35. If the MPS is .5 and the economy has an inflationaryspending gap of $6 billion, we may conclude that the equilibrium level of GDP is ($6/$12/$18) billion above the FE GDP. AE AE1 AE2 -$6 Y*YI 36. If the government decreases G&T by $10 billion, then a MPS of .10, the equilibrium GDP would (increase/decrease) by ($5/$10/$100) billion. 37. With a MPC of .75, Government increases G&T by $8 billion. The equilibrium GDP (increases/decreases) by ($75/$32/$8) billion. 38. If the government runs a budgetsurplus and desires to curb inflation, it should (give the surplus back/keep it in storage).

  8. Fiscal Policy Test Review 1-4 1. Expansionary fiscal policywill be mosteffective [increase GDP]when the AS curve is(vertical/horizontal) & (incr/decr) “C” and (incr/decr)unemployment. 2. The paradox of thrift indicates that an increase in saving (matched/ unmatched) by an increase in investment will lower equilibrium GDP. 3. A contractionary fiscal policy [decr G, incr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. An expansionary fiscal policy [incr G, decr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. 4. In the AE model, if AE[AD]doesn’t buy up FE output(GDP), then the equilibrium output is (less than/more then) full employment output. [G ; LFM ; In. Rates ] [On #3, start from a balanced budget] G $2 Tr. T $2 Tr. [G ; LFM ; In. Rates ] “Inflationary Gap” “Recessionary Gap”

  9. 5. Todecrease AD the greatest amount, the government should: (decrease “G” only/increase “T” only/both decr G & incr T) 6. To increase AD the greatest amount, the “G” should: (increase “G” only/decrease “T” only/both incr G and decr T) 7. In arecessionarygap(AE model)at theequilibrium point[actualGDP] planned investmentis (greater than/equal to/less than)saving, but at theFE GDP level, planned investment[backup] is (greater than/equal to/less than)saving. 8. In aninflationarygap(AE model), at the equilibrium point [actual GDP] planned investment[backup] is (greater than/equal to/less than)saving, but at the FE level, planned investment is (greater than/equal to/less than)saving. 9. If businesses are experiencing anunplanned increase in inventories, AE is (less than/greater than)FE output & spendingwill (increase/decrease). 10. If businesses are experiencing anunplanned decrease in inventores [disinvestment] AE is (less than/greater than)FE output & spendingwill (increase/decrease).

  10. 500 500 11. If “C” equals income at $500 billion, & MPC is .9, then an increase in Ig of $10 billion will change equilibrium GDP to ($400/$490/$510/$600) billion. 12. A conservative economist would want tax (incr/decr) during a recession & (incr/decr) in “G” during inflationary times. 13. A liberal economist would want tax (incr/decr) during an inflation & (incr/decr) in “G” during recessionary periods. 14. An inflationary gapindicates AE[actual GDP] (exceeds/falls short of) FE GDP. 15. A recessionary gapindicates AE[actual GDP] (exceeds/falls short of) FE GDP. 16. To increase GDP[but reduce military spending], we would combine two (domestic/overseas) bases into one (domestic/overseas) base. 17. A tax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates. 18. A tax increase to contract the economywould(incr/decr) Y & (incr/decr) IR.

  11. Test Review 19-22 19. Toincrease equilibrium GDP by $400,000, with a MPC of .5, a Keynesian economist would (decrease “T”/increase “G”) by $200,000. 20. Assumeequilibrium GDP is $500 billion& MPS is .4. Now “G” collects taxes of of $22 billion and spends the entire amount. As a result, equilibrium GDP will change to: ($445/$478/$522/$555). 21. With a MPC of .5, a $12 billion increase in “G” will increase “C”by($12/$24/$36) bil. 22. With a MPC of .5 and the economy in a recessionaryspending gapof $12 billion, we may conclude that the equilibrium is ($12/$24/$36) billionshort of FE GDP.

  12. Test Review – AE & Fiscal Policy .5 [Incr T or Decr G] 23. An increase in Ig of $25 billion results in an increase in equilibrium income (GDP) of $50B, so the MPS is? 24. A contractionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. 25. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment. 26. With a MPC of .5, and the economy with an inflationaryGDP Gapof $50B, G could eliminate this inflationaryGDP Gapby reducing government spendingby? 27. With a MPC of .5 and current output at $500 bil. but FEoutput is $700 bil., correct fiscal policy would be to (increase G/decrease T) by $100 billion. $25 bil.

  13. Test Review – AE & Fiscal Policy 28. An increase in Ig in an economy (increase)/decrease)GDP & (increase/decrease) C. 29. In arecessionary economy, at FEGDP, savingis (less than/more than)Ig. 30. In arecessionary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). 31. In amixed-closed economy(no Xn), theleakagesare? and theinjectionsare? 32. If the economy has aninflationary Gap, at FE GDP,saving(exceeds/is less than) Ig. 33. If there is anequal increase inG&T of $25 bil., then outputwill(increase/decrease)&interest rates [based on PL] will (increase/decrease). [S & T] [G & Ig]

  14. “Econ, econ” Review for AE & Fiscal Policy

  15. ME [G, Ig, or Xn] = 1/MPS = 1/.25 = 4 So, G increase of $20 bil. will incr Y by $80 bil. [$20x4=$80] And a G decrease of $20 bil. will decrease Y by $80 bil.[-$20x4=-$80 bil.] The ME, MT, &MBB Multipliers MT = MPC/MPS = .75/.25 = 3 So, Tdecreaseof $20 bil. will incr Y by $60 bil. [$20 x 3=$60] And a T increase of $20 bil.will decr Y by $60 bil. [-$20x3=-$60] MBB = 1 So, an increase in G&T of $20 bil. will incr Y by $20 bil. [$20x1=$20] And adecrease in G&T of $20 bil. will decr Y by $20 bil.[-$20x1=-$20] Any increase in expenditures x theM will increase GDP. Any decrease in expenditures x the M will decreaseGDP.

  16. o 45 Equilibrium GDP after $20 bil. Ig [MPC=.75] AE[C+Ig][“Basic” or “Simple” economy] S C + Ig $530 510 490 470 450 430 410 390 370 Closed Private Consumption Equilibrium AE[C+Ig](billions ofdollars) Ig = $20 Billion C =$450 Billion + 20 Ig +80 o 370 390 410 430 450 470 490 510 530 550 Real domestic product, GDP (billions of dollars)

  17. o 45 Equilibrium GDP after X of $10 & M of $10 (C[450] + Ig[20] +M[10] + X[10] = GDP[470]) S $530 510 490 470 450 430 410 390 370 C + Ig+Xn Open Private Consumption Equilibrium AE [C+Ig+Xn](billions of dollars) Ig = $20 Billion C = $450 Billion o 370 390 410 430 450 470490 510 530 550 Real domestic product, GDP (billions of dollars)

  18. o 45 ADDING THE PUBLIC SECTOR [“G”] $20 Billion Government Purchases and Equilibrium GDP S Government Spending of $20 Billion C + Ig+ Xn+ G C + Ig + Xn $20 bil. on National Defense $550 Consumption $470 Increases Y by $80 [$20 x 4 = $80] Private-public - ROW $390 Mixed - Open AE (billions) o 550 390470 Real domestic product, GDP (billions of dollars)

  19. o 45 ADDING THE PUBLIC SECTOR [“G”] Incr. T by $20 billion [MT = 3] Equilibrium GDP[-60] S C + Ig+ Xn + G Ca + Ig + Xn+ G $550 $20 bil. incr in T $490 Mixed-Open -20 x 3 = -$60 o $550 $490 Real domestic product, GDP (billions of dollars)

  20. BalancedBudget [$2 Tril. “G” = $2 Tril. “T”] Recession Incr G to $2.2 or Decr T to $1.8 $2 Trillion $2 Trillion Deficit so higher I.R. Gonna have to borrow G T So expansionary fiscal policy leads to higher interest rates. Deficit Inflation Decr G to $1.8 or Incr T to $2.2 Surplus so Lower I.R. Wow! A surplus Budget So, contractionary fiscal policy leads to lower interest rates.

  21. Test Review – AE & Fiscal Policy .25 [Decr T or Incr G] 1. An increase in Ig of $75B results in an increase in equilibrium income(GDP) of $300B, so the MPS is? 2. An expansionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates. 3. Increasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment. 4. With a MPC of .75, and the economy with an inflationaryGDPGap of $80B, G could eliminate this inflationary equilibriumGDPGap by reducing government spending by? 5. With a MPCof .60 & current output at $650bil. but FEoutput is $700 billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion. $2 Tr. $2 Tr. T G $20 bil.

  22. Test Review – AE & Fiscal Policy 6. An increase in Ig in an economy will (incr)/decr) GDP and (incr/decr) C. 7. In a recessionary economy,at FE GDP, savingis (less than/more than) Ig. 8. In an inflationary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). 9. In the complex economy (C+Ig+G+Ig), the leakages are? and the injections are? 10. If the economy has an inflationary Gap, at FE GDP, saving (exceeds/is less than) Ig. 11. If there is anequal increase in G&T of $10 bil., then output will (incr/decr) & interest rates will (incr/decr). [G, Ig, X] [S, T, & M]

  23. [Revised] S Practice Quiz 3 AE (C+Ig2) F AE (C+Ig1) Consumption D E C AE (C+Ig) A B G 45 W VU T Real GDP 0 1. At income level “OT”, the volume of consumption is _____. 2. At income level “OT”, the volume of savingis _____. 3. The “APC” is equal to “1” at income level _____. 4. If Ig is Ig1, then “equilibrium GDP” is _____. 5. If Ig is Ig2, then “equilibrium GDP” is _____. 6. If Ig increases from Ig1 to Ig2, equilibrium GDP increases by _____. 7. If Ig increases from Ig1 to Ig2, the “MPC” is equal to __________. 8. As we move from income level OV to OU, the “MPS” is ________. 9. The economy is “dissaving” at income level _____. 10. Consumption will be equal to income at income level_____. TC CF OV OU OT UT BC/UT AE/VU OW OV

  24. The next 3 slides will get you ready for the AE Quiz Hard Quiz Ahead

  25. S Quiz Practice AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C Consumption F D AE[C+Ig+G+Xn] H $1,000 E $700 I J P +300 Inflat. Gap $400 Recess. Gap $100 200400 1,000 1,6002,200 bil. 0 N QK LM Real GDP 1. The APC is “one” at letter: (J/H/G/A). 2. Consumption will be equal to income(GDP) at (200/400/1000). 3. A shift from AE2 to AE3 would be caused by a[an] (appreciation/depreciation) of the dollar. 4. If there is a shift from J to H, the simple multiplier is: (2/3/4/5) 5. If the FE GDP is OL & we are at AE2 then there is a(an): a. recessionary gap b. inflationary gap c. no gap 6. If the FE GDP is OL & we are at AE1, the (recess./inflat.) gap is (AB/BC).

  26. S Quiz Practice AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C Consumption F D AE[C+Ig+G+Xn] E H $1,000 I $700 J $400 P +300 Inflat. Gap Recess. Gap $100 200400 1,000 1,6002,200bil. 0 N QKLM Real GDP 7. If the FE GDP is OL [$1,600] and we are at AE3, the (recessionary/inflationary) gap is: (BC or AB). 8. The equilibriumlevel of GDP at AE3 is ($1,000/$1,600/$2,200). 9. If FE is OL [$1,600] & we are at AE1, correct fiscal policy would be to (increase/decrease) “G” &/or (increse/decrease) “T”. 10. If FE is OL [$1,600] & we are at AE3, correct fiscal policy would be to (increase/decrease) “G” &/or (increase/decrease) “T”. 11. At income level OK, the volume of saving is: ($300/$700/$1,000). 12. The economy is dissaving GDP level: ($200/$400/$600).

  27. Quiz Practice S AE3[C+Ig+G+Xn] A $2,200 AE2[C+Ig+G] B AE1[C+Ig] G $1,600 C 13. A shift from “J” to “H” would result in a MPC of: (HK/OK or IP/QK or HI/OK) 14. A shift from “J” to “H” would result in a MPS of: (HK/OK or IP/QK or HI/QK) 15.At AE1, consumption totals ($200/$300/$700). C F D E H $1,000 AE[C+Ig+G+Xn] I $700 J $400 P +300 Inflat. Gap Recess. Gap $100 200400 1,000 1,600 2,200bil. 0 N QK L M 15. If the FE GDP is OL and we are at AE1, a (recess/inflat) gap, we can conclude that at the equilibrium point, saving(is less than/equals/exceeds) planned investment, but at the FE level[$1,600], saving (is less than/equals/exceeds) planned investment by (HI/GF). 17. At AE1[$1,000], the G decreases both G & T by $400 billionto balance the budget. With a simple multiplier of 5, the GDP (increases/decreases) to ($600/$1,000/ $1,600/$1,800). 18. At AE1($1,000), the G spends $500billion& increases taxes by $500 billion to balance the budget. With a simple multiplier of 5 the GDP (increases/decreases) to ($500/$1,000/$1,500/$1,800).

  28. 1. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b The AE Quiz 1.The economy is dissaving at a. 200 b. 400 c. 1,000 2. Aggregate saving will be zero where GDP is a. $200 b. $400 c. $600 3. At AE1, savings totals a. $300 b. $700 c. $1,000 4. If the FE GDP is OL& we are at AE3 the inflationary gap is a. BC b. AB c. CD G Hard Quiz +300 $100 5. If the FE GDP is OL & we are at AE1 we can conclude that at the FE GDP: a. “S” exceeds Ig by GF b. Ig exceeds “S” by GF 6. Moving from J to H, the MPC is: a. FE/KL b. IP/OK c. IP/QK 7. A movement from AE2 to AE3 would be caused by a(an) _______ of the dollar? A. appreciation b. depreciation 8. If the FE GDP is OL & we are at AE1 the recessionary gap is: a. AB b. BC c. CD 9. Consumption is equal to GDP at: a. 200 b. $400 c. $600 10. At AE1($1,000 GDP),G increases G&T by $100 billion. With a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200

  29. If MPS incr from .10 to .20, the ME would decrease from 10 to 5. 1. (81%) The value of the spending multiplier(ME) decreases when a. tax rates are reduced d. government spending increases b. exports decline e. the marginal propensity to save increases c. imports decline 2. (75%) Which of the following policies would a Keynesian recommend during a period of high unemployment and low inflation? a. decreasing the MS to reduce AD b. decreasing taxes to stimulate AD c. decreasing government spending to stimulate AS d. balancing the budget to stimulate AS 3. (47%) Which of the following best explains why equilibrium income will increase by more than $100 in response to a $100 increase inG? a. Incomes will rise, resulting in a tax decrease. b. Incomes will rise, resulting in higher consumption. c. The increased spending raises the aggregate price level. d. The increased spending increases the money supply, lowering interest rates. e. The higher budget deficit reduces investment. 4. (56%) Unexpected increases in inventories usually precede a. increases in inflation b. increases in imports c. stagflation d. decreases in production e. decreases in unemployment AE & Fiscal Policy Questions on 2000 AP Exam The Multiplier ensures more C with each round.

  30. 5. (63%) The economy on the right is currently experiencing a. inflation b. recession c. expansion d. stagflation e. rapid growth 6. (77%) Correct monetary policy to reach FE GDP is to increase a. the MS b. the RR c. discount rate d. taxes e. exports 7. (36%) The minimum increase in government spendingto reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $100 8. (58%) In the simple Keynesian AE model[not AD/AS]of an economy, changes in Ig or G will lead to a change in which of the following? a. the price level b. the level of output and employment c. interest rates d. the AS curve 9. (83%) In a closed-private in which the APC is .75, which of following is true? a. If income is $100, then saving is $75. d. If income is $200, then “C” is $75 b. If income is $100, then “C” is $50 e. If income is $500, then saving is $100 c. If income is $200, then saving is $50 AE S C+Ig E $500 C A $400 Full.Employ. 0 $800$1,000 $2,000 Determine what the “M” is going from A to E; then M X ? = $1,000

  31. 10. (63%) Suppose that DI is $1,000, consumption is $700, and the MPC is .6. If DI then increases by $100, consumption and savings will equal which of the following? ConsumptionSavings a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340 Fiscal Policy Questions from 2000 Exam 11. (73%) An inflationary gapcan be eliminated by all of the following EXCEPT a. an increase in personal income taxes d. a decrease in G b. an increase in the MS e. a decrease in Xn c. an increase in the interest rate 12. (56%) A major advantage of automatic stabilizers in fiscal policy is that they a. reduce the public debt b. increase the possibility of a balanced budget c. stabilize the unemployment rate d. go into effect without passage of new legislation e. automatically reduce the inflation rate If $700 of $1,000 DI is consumed, then saving is $300. MPC of .6 means if DI increases by $100, then $60 more will be consumed &$40(.4) more will be saved(40%). The $60 added to the $700 already consumed = $760consumed and the additional $40 saved = $340 saved. Which answer does not slow the economy?

  32. 13. (70%) In the short run, a contractionary fiscal policy will cause AD, output, and the price level to change in which of the following ways? ADOutput Price level a. decrease decrease decrease b. decrease increase increase c. increase decrease decrease d. increase increase increase 14. (52%) Crowding out due to government borrowing occurs when a. lower interest rates increase private sector investment b. lower interest rates decrease private sector investment c. higher interest rates decrease private sector investment d. a smaller money supply increases private sector investment 15. (41%) If, at FE, the G wants to increase its spending by $100 billion without increasing inflation in the short run, it must do which of the following? a. raise taxes by more than $100 billion c. raise taxes by less than $100 b. raise taxes by $100 billion d. lower taxes by $100 billion 16. (42%) Compared to expansionary monetary policies adopted to counteract a recession, expansionary fiscal policies tend to result in a. less public spending c. a high rate of economic growth b. higher interest rates d. lower prices

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