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Exam 12: Fiscal Policy

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Question 81

Multiple Choice

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As the tax wedge associated with a given economic activity gets smaller,we would expect

A) more of that economic activity to occur.
B) the distortions caused by taxes on that activity to be greater.
C) people to engage in less of that particular activity.
D) no change in the practice of that activity until the tax wedge ultimately disappears.
E) people will spend more on that economic activity.

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Question 82

Multiple Choice

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A decrease in which of the following would decrease the tax wedge?

A) marginal tax rate
B) money supply
C) national debt
D) federal budget deficit
E) property taxes

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Question 83

True/False

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In absolute value,the tax multiplier is greater than the government purchases multiplier.

Suppose that the federal government allocates $100 million to clean up after a record snowfall bury the Maritimes.It also raises taxes by $100 million to keep the deficit from growing.If the marginal propensity to consume is 0.9,what is the effect on equilibrium GDP?

Prior to the 1970s,the majority of dollars spent by government was spent at the provincial and local levels.

If the absolute value of the tax multiplier equals 1.6,real GDP is $1.3 trillion,and potential real GDP is $1.34 trillion,then taxes would need to be cut by ________ to restore the economy to potential real GDP.

Figure 12.8 Alt text for Figure 12.8: In figure 12.8,a graph comparing real GDP and price level. Long description for Figure 12.8: The x-axis is labelled,real GDP (trillions of 2007 dollars) .The y-axis is labelled,price level (CPI) .7 lines are shown; SRAS1,SRAS2,AD1,AD without policy,AD with policy,LRAS1,and LRAS2.Line SRAS1 begins in the bottom left corner and slopes up to the top right corner.Line SRAS2 follows the same slope as line SRAS1,but is plotted to the right.Line AD1 begins at the top left corner and slopes down to the end of the x-axis.Lines AD without policy,and AD with policy,follow the same slope as line AD1,but are plotted to the right.Line LRAS1 is perpendicular to the x-axis,and begins from the x-axis value 1.70.Line LRAS2 is perpendicular to the x-axis,and begins from the x-axis value 1.75,to the right of line LRAS1.Line LRAS1 intersects lines AD1 and SRAS1 at point A (1.70,125) .Lines AD without policy,and SRAS2 intersect at point B (1.73,127) .Line LRAS2 intersects the lines AD with policy,and SRAS2 at point C (1.75,130) . -Refer to Figure 12.8.In the graph above,suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B.Which of the following policies could the federal government use to move the economy to point C?

Assuming a fixed amount of taxes and a closed economy,calculate the value of the government purchases multiplier,the tax multiplier,and the balanced budget multiplier if the marginal propensity to consume equals 0.5.

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium.For Year 2,graph aggregate demand,long-run aggregate supply,and short-run aggregate supply such that the condition of the economy will induce Parliament to conduct expansionary fiscal policy.Briefly explain the condition of the economy and what Parliament is attempting to do.

An increase in government spending lowers interest rates and increases the rate of investment in new capital.

Government spending on health care has been

During recessions,government expenditure automatically

By the time you're likely to start thinking about retirement,

Why will there be less crowding out of private spending by government spending the less sensitive consumption,investment,and net exports are to changes in interest rates?

Illustrate and explain the effects of tax reduction and simplification using the dynamic aggregate demand and supply model.To simplify the analysis,assume that aggregate demand is not affected by the tax cut.

Table 12.1 -Refer to Table 12.1.Suppose the economy is in the state described by the table above.What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and aggregate supply diagram to illustrate the appropriate fiscal policy to use in this situation.

If real GDP is $300 billion below potential GDP and the tax multiplier equals -1.5,then how much would the government need to change taxes to bring the economy to equilibrium at potential?

Fiscal policy refers to changes in

If the federal budget has an actual budget deficit of $35 billion and a cyclically adjusted budget deficit of $30 billion,then the economy

Which of the following would be most likely to induce the federal government to conduct expansionary fiscal policy?