1. The federal government decreases taxes. As a result of this fiscal palicy the price level (index)______ real actual GDP ______ and unemployment _____.

2. Suppose initially, equilibrium real GDP is $17.4 trillion. The government wishes to increase real GDP to $17.8 trillion. For every $100 change in government spending X offset by a $20 change in real planned investment expenditures. If the marginal propensity to consume (MPC is 0.75, then government purchases should change by_____ billion to close this gap.

3. If the government increases lump-sum taxes by $100 billion and increases government purchases by $100 billion at the same time and the MPC = 0.75, then real GDP will.

A. increase by $100 billion.

B. will not change

C. decrease by $100 billion.

D. increase by more than $100 billion.

4. Suppose actual real GDP is $15 trillion and potential real GDP is $16 trillion. If the marginal propensity to consume (MPC is 0.75, then lump-sum taxes should change by ______ billion to close this gap.

5. One of the shortcomings of fiscal policy is that.

A. it is subject to significant time lags, which make it more effective. B. it is subject to significant time lags, which make it more effective. C. it takes effect immediately and thus is destabilizing.

D. it is subject to time lags and so may end up destabilizing the economy. E. it affects aggregate demand indirectly through changes in interest rates.