Fiscal Policy

Question 1

Which of the following would be an expansionary fiscal policy?

APlacing a limit on government expenditures

BRaising the income tax rate

CIncreasing the corporate tax rate

DAn increase in infrastructure spending

EA decrease in defense spending

Question 2

What would be the net effect of the government increasing the taxes by $10 billion at the same time that it decreased spending by $5 billion? Assume a marginal propensity to save of 0.1.

ADecreasing aggregate demand by $40 billion

BDecreasing aggregate demand by $140 billion

CIncreasing aggregate demand by $40 billion

DIncreasing aggregate demand by $140 billion

EThe impact on aggregate demand is indeterminate.

Question 3

Which of the following statements about fiscal policy is accurate?

AThe tax multiplier has a greater impact than the spending multiplier.

BGovernment spending has a direct impact on short-run aggregate supply.

CIt will decrease the inflation rate.

DIt can only be used to correct a recessionary gap.

EThere is a time lag between discretionary spending and its impact.

Question 4

LRAS SRAS Price Level K PLA PLE - - AD, AD, $400 $640 Real GDP (Billions)