1. With the Employment Act of 1946Employment Act of 1946, the federal government committed itself to accept (total/some) degree of responsibility for employment/prices.2. Fiscal policyFiscal policy is carried out primarily by the (local/state/federal) government.3. Discretionary fiscal policyDiscretionary fiscal policy [G & T] (does/does not) require congressional action.4. In a mixedmixed [private & public) closed economyclosed economy, taxes & (savings/government spending) are leakagesleakages, while Ig and (savings/government spending) are injectionsinjections.5. In a mixedmixed economyeconomy, the equilibrium GDP exists where (C+Ig/C+Ig+G+Xn)=GDP.6. The balanced budget multiplierbalanced budget multiplier indicates that equal increases in G&T tend to (decrease/increase/not change) the equilibrium GDP. [MBB is “1”]7. Assume in a private economy that equilibrium GDP is $400 billionequilibrium GDP is $400 billion & the MPC is .80. Suppose the G collects new taxes of $50 bil.G collects new taxes of $50 bil. & spends the entire amountspends the entire amount on our infrastructure. As a result equilibrium GDP will be ($400/$450/$500) bil.

8. Suppose a constitutional amendmentconstitutional amendment requires that the G always balanceG always balance its budgetits budget. If it desired to increase GDP by $40 billionincrease GDP by $40 billion, G should (increase/decrease) government spending & taxes by ($30/$40/$50) billion.

12. If the F.E. GDP is OCF.E. GDP is OC, then it would be appropriate fiscal policy for government to (increase/decrease) “G”“G” and (increase/decrease) “T”“T”.

13. If the F.E. GDP is OAF.E. GDP is OA, then it would be appropriate fiscal policy for government to (increase/decrease) “G”“G” and (increase/decrease) “T”“T”.

10. If the government tries to eliminate a budget deficit during a depressioneliminate a budget deficit during a depression, these efforts will (help/hurt) the depression.

11. A conservative economistconservative economist who advocates an active fiscal policy

would recommend taxtax (increases/decreases) during a recessionrecession and

(increases/decreases) in government spendinggovernment spending during inflationinflation.

9. In a severe recessionsevere recession, Keynesians would favor a(n) (increase/decrease) in taxes.

YYIICC AA

AEAE11

AEAE22PLPL

YYR R Y*Y*800 800 ??

AEAEPLPL

OO YYRR

SS

14. If G increases its spending during a recessionduring 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 expansionarymost expansionary.

15. The following fiscal actionsfiscal actions, (incurring a budget surplusand 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 in curbing inflationcurbing inflation.

16. The greatest anti-inflationary impact of a budgetgreatest anti-inflationary impact of a budget surplussurplus will occur when the G (impounds/uses) the surplus funds & lets them (stand idle/pay off the debt).

17. In describing the built-in stabilizersbuilt-in stabilizers, we can say that

personal personal && corporate income tax collections corporate income tax collectionsautomatically (incr/decr) as as GDP increasesGDP increases & transferstransfers and subsidiesand subsidies (incr/decr) as as GDP increasesGDP increases.

Should I Should I give it back?give it back?

Answer the next 3 questions(18-21) based on the diagram.18. DeficitsDeficits will be realized at GDP levels (below/above) C, and surplusessurpluses (below/above) C.19. If the F.E. GDPF.E. GDP for the economy is at DD, the F.E. budgetF.E. budget will entail a (deficit/surplus).20. If the tax line had a greater slopetax line had a greater slope [more progressive tax system], stabilitystability would be (less/greater).21. If government adhered strictly to an annually balancedadhered strictly to an annually balanced budgetbudget then the government’s budget would tend to (destabilize/stabilize) the economy.

T2

11

For For Questions 22-24Questions 22-24 [graph] [graph]22. (T1/T4) tax system is characterized by the least built-in stabilityleast built-in stability.23. (T1/T4) tax system is characterized by the most built-in stabilitymost built-in stability.24. (T1/T4) tax system will generate the largest cyclical deficitslargest cyclical deficits.25. NondiscretionaryNondiscretionary Fiscal Policy (does/does not) require congressional action.

26. If the MPC is .5, a $10 B increase in “G”$10 B increase in “G” will increase “Cincrease “C”” [not incomenot 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 surplusgovernment tries to give back a surplus during an inflationaryduring an inflationary FE yearFE year, this will be (pro-cyclical/counter-cyclical). 28. When politicians use fiscal policy to cause an improvementimprovement in the economy just prior to an electionin 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 borrowingG incurs a deficit which is financed by borrowing, causing interest rates to increase which decreases Iginterest rates to increase which decreases Ig, this is called the (crowding-in/crowding out) effect.30. Supply-sidersSupply-siders argue that the primary effect of tax cutsprimary effect of tax cuts is to shift the AS curve (leftward/rightward).

34. If the MPS is .2MPS is .2 and the economy has a

recessionary spending gap of $5recessionary spending gap of $5 billionbillion, we may conclude that the equilibriumequilibrium levellevel of of GDPGDP is ($5/$20/$25) below the FE GDP.

33. In a private-closed economy, the MPS is .2MPS is .2,

consumption equals income at $200 consumption equals income at $200 billionbillion, and the level of investmentinvestment is is $10 $10 billionbillion. The equilibrium level of income at the new level is ($200/$250) billion.

31. If the MPC is .8MPC is .8, a $2 billion increase in “G”$2 billion increase in “G” will increase

““consumption”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 .9MPC is .9, a $1 billion increase in “G”$1 billion increase in “G” will increase ““consumption”consumption” by ($10/$9/$8) billion.

45°45°

45°45°

C+IgC+Ig

200200

200200 ??

““C”C”

+$10 Ig+$10 Ig

AEAE

AE1AE1

AE2AE2

YYR R ??

AEAE

+$5+$5

SS

SS

36. If the government decreases G&T by $10 billiongovernment decreases G&T by $10 billion, then a

MPS of .10MPS of .10, the equilibrium GDPequilibrium GDP would (increase/decrease) by ($5/$10/$100) billion.

37. With a MPC of .75MPC of .75, Government increases G&T by $8 billionGovernment increases G&T by $8 billion.

The equilibrium GDPequilibrium GDP (increases/decreases) by ($75/$32/$8) billion.

38. If the government runs a budgetgovernment runs a budget surplus and desires tosurplus and desires to curb inflationcurb inflation, it should (give the surplus back/keep it in storage).

35. If the MPS is .5MPS is .5 and the economy has an

inflationaryinflationary spending gap of $6 spending gap of $6 billionbillion, we may conclude that the equilibrium level equilibrium level of GDPof GDP is ($6/$12/$18) billion above the FE GDP.

NS 35 - 38NS 35 - 38

-$6-$6

45°45°

AE1AE1

AE2AE2

Y*Y* YYII

AEAESS

1. Expansionary Expansionary fiscal policyfiscal policy will be most effectiveeffective [increase GDP] when the ASAS curve is curve is (vertical/horizontal)

& (incr/decr) “C” and (incr/decr) unemployment.

2. The paradox of thriftparadox of thrift indicates that an increase in saving (matched/ unmatched) by an increase in investment will lower equilibrium GDP.

3. A contractionary fiscal policycontractionary fiscal policy [decr Gdecr G, , incr Tincr T] would cause a[an] (incr/decr) in output[GDP] and a[an] (incr/decr) in interest rates. An expansionary fiscal policyexpansionary fiscal policy [incr Gincr G, , decr Tdecr 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(GDPAE[AD]doesn’t buy up FE output(GDP)), then the equilibrium output is (less than/more then) full employment output.

[G ; LFM ; In. Rates ][G ; LFM ; In. Rates ]

[G ; LFM ; In. Rates ][G ; LFM ; In. Rates ]

G G $2 Tr.$2 Tr. T T $2 Tr$2 Tr..[On #3, start froma balanced budget]

““Recessionary Gap”Recessionary Gap” ““Inflationary Gap”Inflationary Gap”

5. To decrease AD the greatest amountdecrease 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 a recessionaryrecessionary gapgap (AE model) at the equilibrium point[actualequilibrium point[actual GDP]GDP] planned investmentplanned investment is (greater than/equal to/less than) savingsaving,, but at the FEFE GDP levelGDP level, planned investment[backup] is (greater than/equal to/less than) savingsaving.8. In an inflationaryinflationary gapgap(AE modelAE 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 an unplanned increase in inventoriesunplanned increase in inventories, AE is (less than/greater than) FE output & spendingFE output & spending will (increase/decrease).10. If businesses are experiencing an unplanned decrease in inventoresunplanned decrease in inventores [disinvestmentdisinvestment] AE is (less than/greater than) FE output & spendingFE output & spending will (increase/decrease).

11. If “C” equals income at $500 billion“C” equals income at $500 billion, & MPC is .9MPC is .9, then an increase in Ig of $10 billion will change equilibrium GDP to ($400/$490/$510/$600) billion.12. A conservative conservative economisteconomist would want tax (incr/decr) during a recessionrecession & (incr/decr) in “G” during inflationary timesinflationary times.13. A liberal economistliberal economist would want tax (incr/decr) during an inflationinflation & (incr/decr) in “G” during recessionary periodsrecessionary periods.14. An inflationary gapinflationary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.

15. A recessionary gaprecessionary gap indicates AE[actual GDP] (exceeds/falls short of) FE GDP.

16. To increase GDP[but reduce military spending]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 economytax cut to expand the economy would (incr/decr) Y & (incr/decr) in. rates.18. A tax increase to contract the economytax increase to contract the economy would (incr/decr) Y & (incr/decr) IR.

500500

500500

19. To increase equilibrium GDP by increase equilibrium GDP by $400,000$400,000, with a MPC of .5, a Keynesian economist would (decrease “T”/increase “G”) by $200,000.

20. Assume equilibrium GDP is equilibrium GDP is $500$500 billion billion & MPS is .4. Now “G” collects taxes of of “G” collects taxes of of $22$22 billion and spends billion and spends the entire amountthe entire amount. As a result, equilibrium GDP will change to: ($445/$478/$522/$555).21. With a MPC of .5MPC of .5, a $12 billion$12 billion increase in “G” will increaseincrease “C” “C” by ($12/$24/$36) bil.

22. With a MPC of .5MPC of .5 and the economy in a recessionaryrecessionary spending gapspending gap of of $$1212 billion billion, we may conclude that the equilibrium is ($12/$24/$36) billion short of FE GDPshort of FE GDP.

23. An increase in Ig of $25 increase in Ig of $25 billionbillion results in an increase in equilibrium income (GDP) of $50B, so the MPS is?24. A contractionary fiscal policycontractionary fiscal policy results in a(n) (incr/decr)

in output, and a(n) (incr/decr) in interest rates.

25. Increasing T or decreasing GIncreasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.

26. With a MPC of .5.5, and the economy with an inflationaryinflationary GDP GDP GapGap of $50B$50B, GG could eliminate this inflationaryinflationary GDP GapGDP Gap by reducing government spendingreducing government spending by?

27. With a MPC of .5MPC of .5 and current output at $500 bil. but FEcurrent output at $500 bil. but FE output is $700 biloutput is $700 bil., correct fiscal policycorrect fiscal policy would be to

(increase G/decrease T) by $100 billion.

[Incr T or Decr G][Incr T or Decr G]

.5.5

$25 bil.$25 bil.

28. An increase in Igincrease in Ig in an economy (increase)/decrease) GDP & (increase/decrease) C.

29. In a recessionary economyrecessionary economy, at FEFE GDPGDP, savingsaving is (less than/more than) IgIg. 30. In a recessionary economyrecessionary economy, (actual Y/potential Y) exceeds (actual Y/potential Y). 31. In a mixed-closed economymixed-closed economy (no Xnno Xn), the leakagesleakages are? and the injectionsinjections are?32. If the economy has an inflationary Gapinflationary Gap, at

FE GDPFE GDP, savingsaving (exceeds/is less than) Ig.

33. If there is an equal increase inequal increase in GG&&T T of of $25 $25 bilbil., then outputoutput will (increase/decrease) & interest ratesinterest rates [based on PL][based on PL] will (increase/decrease).

[S & T][S & T] [G & Ig][G & Ig]

Review for Review for AE AE && Fiscal Policy Fiscal Policy

““Econ, econ”Econ, econ”

The The MMEE, , MMTT, , && MMBBBB MultipliersMultipliersMMEE [ [G, Ig, or XnG, Ig, or Xn] = ] = 1/MPS1/MPS = = 1/.251/.25 = = 44

So, GG increase of $20 bil. increase of $20 bil. will incr Y by $80 bil.incr Y by $80 bil. [$20x4=$80$20x4=$80]And a GG decrease of decrease of $20$20 bil. bil. will decrease Y by $80 bil.decrease Y by $80 bil. [--$20x4=$20x4=--$80 bil.$80 bil.]

MMTT = = MPC/MPSMPC/MPS = = ..75/.2575/.25 = = 33So, TT decreasedecrease of $20 bil.of $20 bil. will incr Y by $60 bil.incr Y by $60 bil. [$20 x 3=$60$20 x 3=$60]And a TT increase of increase of $20 bil. $20 bil. will decr Y by $60 bil. [--$20x3=$20x3=--$60$60]

MMBBBB = = 11So, an increase in increase in G&TG&T of $20 bil. of $20 bil. will incr Y by incr Y by $20$20 bil. bil. [$20x1=20x1=$20$20]

And a decrease in G&T decrease in G&T of of $20 bil.$20 bil. will decr Y decr Y byby $20 bil. $20 bil.[--$20x1=20x1=--$20$20]

Any increase in expendituresincrease in expenditures x the x the M will M will increase GDPincrease GDP.Any decreasedecrease in in expendituresexpenditures x the M x the M will will decreasedecrease GDPGDP.

AE

AE

[[ CC ++

IgIg

]] (b

illion

s o

f d

ollars

)

o45

o

CConsumptioonsumptionn

C + C + IIgg

IIg g = $20 = $20 BillionBillion

EquilibriumEquilibrium

Real domestic product, GDP (billions of dollars)

370 390390 410 430 450 470470 490 510 530 550

Equilibrium GDP Equilibrium GDP afterafter $20 bil. Ig [MPC=.75] $20 bil. Ig [MPC=.75]AE[C+Ig]AE[C+Ig] [“Basic” or “Simple” economy][“Basic” or “Simple” economy]

C =$450 BillionC =$450 Billion

$530

510

490

470470

450

430

410

390390

370 + 20 Ig

+ 20 Ig

+80+80

SS

PrivatePrivate ClosedClosed

AE

AE [

C+

[C+

IgIg++

Xn

Xn]]

(bil

lio

ns

of

do

lla

rs)

o45

o

CConsumptiononsumption

C + Ig+XnC + Ig+Xn

IIg g = $20 = $20 BillionBillion

EquilibriumEquilibrium

Real domestic product, GDP (billions of dollars)

370 390390 410 430 450 470470 490 510 530 550

(C[450450] + Ig[2020] +M[1010] + X[1010] = GDPGDP[[470470]]))Equilibrium GDP after X of $10 & M of Equilibrium GDP after X of $10 & M of

$10$10

C = $450 BillionC = $450 Billion

$530

510

490

470470

450450

430

410

390390

370

SSPrivatePrivate OpenOpen

ADDING THE PUBLIC SECTOR ADDING THE PUBLIC SECTOR [“G”][“G”]

AE (

billion

s)

o45

o

Real domestic product, GDP (billions of dollars)

390390 470470

ConsumptioConsumptionn

C + IC + Ig g + X+ Xnn

C + C + IIgg + + XXnn + + GG

GovernmenGovernmenttSpending ofSpending of$20 Billion$20 Billion

$20 Billion Government Purchases and Equilibrium $20 Billion Government Purchases and Equilibrium GDPGDP SS

Mixed - OpenMixed - OpenPrivate-public - ROW

$20 bil. on National Defense

550550

Increases Y by $80Increases Y by $80[$20 x 4 = $80][$20 x 4 = $80]

$390$390

$470$470

$550$550

-20 x 3 = -$60-20 x 3 = -$60

ADDING THE PUBLIC SECTOR ADDING THE PUBLIC SECTOR [“G”][“G”]Incr. T by $20 Incr. T by $20 billion billion [[MTMT = 3] E = 3] Equilibrium quilibrium GDP[-GDP[-

60]60]

o45

o

Real domestic product, GDP (billions of dollars)

$550$550

C + C + IIgg + X+ Xn n + + GGCCaa + + IIg g + + XXnn + + GG

$490$490

SS

Mixed-OpenMixed-Open

$20 $20 bil.bil. incr incr in in TT

$490$490

$550$550

Gonna have Gonna have to borrowto borrow

BBalancedalanced BBudget [$2 Tudget [$2 Tril. ril. “G” = $2 T“G” = $2 Tril. ril.

“T”]“T”]$2 $2 TrillionTrillion $2 $2 TrillionTrillion

GG TT

RecessionRecessionIncr G to $2.2 Incr G to $2.2

or or

Decr T to $1.8 Decr T to $1.8

DeficitDeficit so sohigher I.R.higher I.R.

InflationInflationDecr G to $1.8Decr G to $1.8

or or

Incr T to $2.2Incr T to $2.2

Surplus Surplus sosoLower I.R.Lower I.R.

BudgetBudget

So expansionary fiscal policySo expansionary fiscal policyleads to leads to higher interest rates.higher interest rates. DeficitDeficit

Wow! AWow! Asurplussurplus

So, contractionary fiscal policySo, contractionary fiscal policy

leads to leads to lower interest rateslower interest rates..

1. An increase in Ig of $75Bincrease in Ig of $75B results in an increase in equilibrium income(GDP) of $300B$300B, so the MPS is?

2. An expansionary fiscal policyexpansionary fiscal policy results in a(n) (incr/decr) in output, and a(n) (incr/decr) in interest rates.

3. Increasing T or decreasing GIncreasing T or decreasing G will (increase/decrease) consumption, and (increase/decrease) unemployment.

4. With a MPCMPC of of .75.75, and the economy with an inflationaryinflationary GDPGDP GapGap of $80B$80B, G could eliminate this inflationary equilibriuminflationary equilibrium GDPGDP GapGap by reducing government spendingreducing government spending by?

5. With a MPCMPC of .60of .60 & current output at $650current output at $650 bil. but FEbil. but FE output is $700output is $700 billion billion, correct fiscal policy would be to (increase G/decrease T) by $20 billion.

.25.25

$20 bil.$20 bil.

[Decr T or Incr G][Decr T or Incr G]

$2 Tr.$2 Tr. $2 Tr$2 Tr..

GG TT

6. An increase in Igincrease in Ig in an economy will

(incr)/decr) GDPGDP and (incr/decr) CC.

7. In a recessionaryrecessionary economy economy, at

FE GDPFE GDP, savingsaving is (less than/more than) Ig.

8. In an inflationary economyinflationary economy,

(actual Y/potential Y) exceeds (actual Y/potential Y).

9. In the complex economycomplex economy (C+Ig+G+IgC+Ig+G+Ig), the leakagesleakages are?

and the injectionsinjections are?

10. If the economy has an inflationary Gapinflationary Gap, at at

FE GDPFE GDP, saving (exceeds/is less than) Ig.

11. If there is an equal increaseequal increase in in GG&&T T of $of $10 bil10 bil., then

output will (incr/decr) & interest rates will (incr/decr).

[S, T, & M][S, T, & M] [G, Ig, X][G, Ig, X]

1. At income level “OT”“OT”, the volume of consumptionconsumption is _____.2. At income level “OT”“OT”, the volume of savingsaving is _____.3. The “APC”“APC” is equal to “1”“1” at income level _____.4. If Ig is Ig1Ig1, then “equilibrium GDP”“equilibrium GDP” is _____.5. If Ig is Ig2Ig2, then “equilibrium GDP”“equilibrium GDP” is _____.6. If Ig increases from Ig1Ig1 to Ig2Ig2, equilibrium GDP increasesequilibrium GDP increases by _____.7. If Ig increases from Ig1Ig1 to Ig2Ig2, the “MPC”“MPC” is equal to __________.8. As we move from income level OVOV to OUOU, the “MPS”“MPS” is ________.9. The economy is “dissaving”“dissaving” at income level _____.10. Consumption will be equal to income at income levelConsumption will be equal to income at income level _____.

TCTCCFCF

OVOVOUOUOTOT

UTUTBC/UTBC/UT

AEAE//VUVUOWOW

OVOV

W W VV U U TT

BB

00

AE

(C

+Ig

)A

E (

C+

Ig)

AE (C+Ig2)AE (C+Ig2)AE (C+Ig1)AE (C+Ig1)ConsumptionConsumption

FF

EEDDCC

Real GDPReal GDP

[Revised][Revised]

4545

GGAA

SS

The next 3 slides The next 3 slides will get you ready will get you ready for the AE Quizfor the AE Quiz

Hard Quiz AheadHard Quiz Ahead

200200 400 400 1,000 1,000 1,6001,600 2,2002,200 bil. bil. 0 0 N N QQ K K LL MM

SS$2,200$2,200

$1,600$1,600

$1,000$1,000$700$700

$400$400JJ PP

II

HH

GG

EE

FF

AA

BB

CC

DD

AEAE33[C[C++IIg+g+GG++XXnn]]

AEAE22[C+Ig+G][C+Ig+G]AEAE11[C+Ig][C+Ig]ConsumptionConsumption

Real GDP Real GDP

Inflat.Inflat.GapGap

RRecessecess..GapGap

1. The APC is “one”APC is “one” at letter: (J/H/G/A).2. Consumption will be equal to income(GDP)Consumption will be equal to income(GDP) at (200200/400400/10001000).3. A shift from shift from AEAE22 to to AE AE33 would be caused by a[an] (appreciationappreciation/depreciationdepreciation) of the dollar.4. If there is a shift from JJ to to H H, , the simple multiplierthe simple multiplier is: (2/3/4/5)

5. If the FE GDP is OLFE GDP is OL & & we are at AEwe are at AE22 then there is a(an): a. recessionary gap b. inflationary gap c. no gap6. If the FE GDPFE GDP is is OLOL & we are at & we are at AEAE11, the (recessrecess./inflatinflat.) gap is (ABAB/BCBC).

$100$100+300+300

AE

[C+

Ig+

G+

Xn

]A

E[C

+Ig

+G

+X

n]

200200 400 400 1,000 1,000 1,6001,600 2,2002,200 bil. bil. 0 0 N N QQ KK LL MM

SS$2,200$2,200

$1,600$1,600

$1,000$1,000$700$700$400$400 JJ

PP

II

HH

GG

EEFF

AA

BB

CC

DD

AEAE33[C[C++IIg+g+GG++XXnn]]

AEAE22[C+Ig+G][C+Ig+G]AEAE11[C+Ig][C+Ig]ConsumptionConsumption

Real GDP Real GDP

AE

[C+

Ig+

G+

Xn

]A

E[C

+Ig

+G

+X

n]

Inflat.Inflat.GapGap

RRecessecess..GapGap

7. If the FE GDP is OL [$1,600]FE GDP is OL [$1,600] and we are at and we are at AEAE33, the (recessionaryrecessionary/inflationaryinflationary) gap is: (BC or AB).8. The equilibriumequilibrium level of GDP at level of GDP at AEAE33 is ($1,000$1,000/$1,600$1,600/$2,200$2,200).9. If FE is OLFE is OL [ [$1,600$1,600] & we are at AE1] & we are at AE1, , correct fiscal policycorrect fiscal policy would be to (increaseincrease/decreasedecrease) “GG” &/or (increseincrese/decreasedecrease) “TT”.10. If FE is OLFE is OL [ [$1,600$1,600] & we are at ] & we are at AEAE33, correct fiscal policy would be to (increase/decrease)(increase/decrease) “GG” &/or (increase/decrease)(increase/decrease) “TT”.11. At income level OKOK, the volume of savingsaving is: ($300/$700/$1,000).12. The economy is dissavingdissaving GDP level: ($200/$400/$600).

+300+300

$100$100

15. If the FE GDP is OL FE GDP is OL andand we are at we are at AE1AE1, a (recessrecess/inflatinflat) gap, we can conclude that at the equilibrium point, savingsaving (is less thanis less than/equals/exceedsequals/exceeds) planned investment, but at the FE level[$1,600FE level[$1,600], ], savingsaving (is less than/equals/exceeds) planned investmentplanned investment by (HI/GF).17. At AE1[$1,000AE1[$1,000],], the G decreases both G & T by $400 billionG decreases both G & T by $400 billion to balance the budget. With a simple multiplier of 5, the GDP (increases/decreases) to ($600/$1,000/ $1,600/$1,800).18. At AE1AE1(($1,000$1,000)),, the G spends $500G spends $500 billionbillion & increases taxesincreases taxes by by $500 billion$500 billion to balance the budgetbalance the budget. With a simple multiplier of 5 the GDP (increasesincreases/decreasesdecreases) to ($500/$1,000/$1,500/$1,800).

13. A shift from “J” to “H”“J” to “H” would result in a MPCMPC of: (HK/OK or IP/QK or HI/OK)14. A shift from “J” to “H”“J” to “H” would result in a MPSMPS of: (HK/OK or IP/QK or HI/QK)15. At AE1, consumption totals ($200/$300/$700). 200200 400 400 1,000 1,000 1,600 1,600 2,2002,200 bil. bil.

0 0 N N QQ K K L L MM

SS$2,200$2,200

$1,600$1,600

$1,000$1,000$700$700$400$400 JJ

PP

II

HH

GG

EEFF

AA

BB

CC

DD

AEAE33[C[C++IIg+g+GG++XXnn]]

AEAE22[C+Ig+G][C+Ig+G]AEAE11[C+Ig][C+Ig]CC

AE

[C+

Ig+

G+

Xn

]A

E[C

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1.The economy is dissavingdissaving at a. 200 b. 400 c. 1,0002. Aggregate saving saving will bewill bezerozero where GDP is a. $200 b. $400 c. $6003. At AEAE11, , savings totalssavings totals a. $300 b. $700 c. $1,0004. If the FE GDP FE GDP is is OLOL & weare at AEat AE33 the inflationaryinflationarygapgap is a. BC b. AB c. CD

5. If the FE GDP is OLFE GDP is OL & we are at AEat AE11 we can conclude that at the FE GDPFE GDP: a. “S” exceeds Ig by GF b. Ig exceeds “S” by GF6. Moving from J to HJ to H, the MPCMPC is: a. FE/KL b. IP/OK c. IP/QK7. A movement from AEAE22 to to AEAE33 would be caused bycaused by a(an) _______ of the dollar? A. appreciation b. depreciation8. If the FE GDP is OLFE GDP is OL & we are at at AEAE11 the recessionary gap isrecessionary gap is: a. AB b. BC c. CD9. Consumption is equal to GDPConsumption is equal to GDP at: a. 200 b. $400 c. $60010. At AEAE11($1,000 GDP)($1,000 GDP), G increases G&TG increases G&T by by $100 billion$100 billion. With a “M” of 2, GDP increases to: a. $1,000 b. $1,100 c. $1,200

Hard QuizHard Quiz

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1. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b1. a 2. b 3. a 4. b 5. a 6. c 7. b 8. b 9. b 10. b

AE AE & & Fiscal Policy QFiscal Policy Questions on uestions on 2000 AP E2000 AP Examxam1. (81%) The value of the spending multipliervalue 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 decline2. (75%) Which of the following policies would a Keynesian recommendKeynesian recommend during a period of high unemployment and low inflationhigh 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 AS3. (47%) Which of the following best explains why equilibrium income willequilibrium income will increase by more than $100 in response to a $100 increase inincrease by more than $100 in response to a $100 increase in GG? 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 inventoriesUnexpected increases in inventories usually precede a. increases in inflation b. increases in imports c. stagflation d. decreases in production e. decreases in unemployment

If MPS incr from .10 to .20, the If MPS incr from .10 to .20, the MMEE would decrease from 10 to 5. would decrease from 10 to 5.

The Multiplier ensures more Cmore Cwith each round.

5. (63%) The economy on the right iseconomy on the right is currently experiencingexperiencing a. inflation b. recession c. expansion d. stagflation e. rapid growth6. (77%) Correct monetary policymonetary policy to reach FE GDPreach FE GDP is to increase increase a. the MS b. the RR c. discount rate d. taxes e. exports7. (36%) The minimum increase in governmentminimum increase in government spendingspending to reach full employment reach full employment is a. $2,000 b. $1,000 c. $500 d. $200 e. $100

8. (58%) In the simple Keynesian AE modelsimple Keynesian AE model [not AD/AS][not AD/AS] of an economy, changes changes in in Ig or G Ig or G will lead to a change in whichlead 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-privateclosed-private in which the APC is .75APC is .75, which of following is truetrue? 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

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Determine what the “M” is goingfrom A to E; then M X ? = $1,000

10. (63%) Suppose that DI is $1,000DI is $1,000, consumption is $700consumption is $700, and the MPC is .6MPC is .6. If DI then increases by $100DI then increases by $100, consumption and savings will equal which of the following? ConsumptionConsumption SavingsSavings a. $420 $280 b. $600 $400 c. $660 $320 d. $660 $440 e. $760 $340

Fiscal Policy Questions from 2000 ExamFiscal Policy Questions from 2000 Exam

11. (73%) An inflationary gapinflationary gap can be eliminatedcan be eliminated by all of the following EXCEPTEXCEPT 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 rate12. (56%) A major advantage of automatic stabilizersadvantage 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 If $700 of $1,000 DI is consumed$700 of $1,000 DI is consumed, then , then saving is $300saving is $300. . MPC of .6MPC of .6 means if DI means if DI increases by $100, then increases by $100, then $60 more will be $60 more will be consumedconsumed & & $40(.4) $40(.4) more will be savedmore will be saved(40%).(40%).The The $60 $60 added to theadded to the $700 $700 already consumedalready consumed= $760= $760 consumedconsumed and the and the additional $40 additional $40 saved = $340 savedsaved = $340 saved..

Which answer doesWhich answer doesnot slow the economy?not slow the economy?

13. (70%) In the short run, a contractionary fiscal policycontractionary fiscal policy will cause ADAD, outputoutput, and the price levelprice level to change in which of the following ways?

ADAD OutputOutput Price levelPrice level a. decrease decrease decrease b. decrease increase increase c. increase decrease decrease d. increase increase increase 14. (52%) Crowding outCrowding 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 billionG 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 billion16. (42%) Compared to expansionary monetary policiesexpansionary monetary policies adopted to counteract a recession, expansionary fiscal policiesexpansionary fiscal policies tend to result in a. less public spending c. a high rate of economic growth b. higher interest rates d. lower prices