Question

QUESTION 46

1. The Keynesian approach to fiscal policy calls for

   a		budget deficits during periods of inflationary pressure
   b		budget surpluses during periods of high unemployment
   c		a balanced budget despite the state of the economy
   d		tax cuts during recession
   e		spending increases during inflation

2. The income effect of an increase in the price of hominy grits (an inferior good) is a(n)

   	a	decrease in the demand for hominy grits
   	b	decrease in the quantity demanded of hominy grits
   	c	increase in the demand for hominy grits
   	d	increase in the quantity demanded of hominy grits
   	e	new demand curve because everything else is no longer constant

3. The Keynesian approach to fiscal policy calls for

   a		budget deficits during periods of inflationary pressure
   b		budget surpluses during periods of high unemployment
   c		a balanced budget despite the state of the economy
   d		tax cuts during recession
   e		spending increases during inflation

Answer 1

46) according to Keynesians approach to fiscal policy, during recession there should be tax cuts so that the aggregate demand could increase and economy could move out of the recession.

Moreover, Keynesian approach does not call for a balanced budget despite the state of economy.

Keeping budget surplus during periods of high unemploymend would adversely affect Employment. Hence, this is never called for.

Hence, the Keynesian approach to fiscal policy calls for tax cuts during recession.

Thus, option d is correct.

Increase in the price of hominy grits would Decrease the real income of the Consumer. Since hominy grits is an Inferior good, the income effect is Negative. It means that as the real income Decreased due to an increase in the price of hominy grits, the demand(not Quantity Demanded) for hominy grits would Increase due to negative income Effect.

Hence, Option c is correct i.e, Increase in the demand for hominy grits.