Question

4. Which of the following statements is (are) correct?
(x) If households view a tax cut as being temporary, the tax cut has more of an effect on aggregate demand than if households view it as permanent.
(y) A decrease in taxes is an example of an expansionary fiscal policy and that policy will probably cause the aggregate demand curve to shift to the right.
(z) An increase in government purchases coupled with a decrease in taxes is an expansionary fiscal policy that will increase the budget deficit.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only.
E. (x) only

5. , which of the following statements is (are) correct?
(x) The multiplier effect is the multiplied impact on aggregate demand of a given increase in government purchases of goods and services.
(y) The marginal propensity to consume (MPC) is defined as the fraction of extra income that a household consumes rather than saves and the larger the MPC the larger the multiplier effect.
(z) According to the multiplier effect, an increase in government purchases causes interest rates to increase which increases investment spending.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only.
E. (y) only

6. Which of the following statements is (are) correct?
(x) According to the textbook, an increase in government spending on goods to build or repair transportation infrastructure and education facilities shifts the aggregate demand curve to the right and, in the long run, shifts the aggregate supply curve to the right.
(y) According to the crowding-out effect, an increase in government purchases causes interest rates to rise and the interest rate increase causes an increase in investment spending.
(z) The multiplier effect amplifies the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only.
E. (z) onl

Answer 1

Ans 4. (A) x, y, z

X - Due to tax cut people have now more money in their hands so, when tax cut is temporary people think to take the advantage of this. So the aggregate demand will increase

Y- Fiscal policy means change in government spending and tax rate

Expansionary fiscal policy means increase in government spending and decrease in taxes.

so because of expansionary fiscal policy aggregate demand curve will shift to the write because people have more money to spend

Z - Expansionary fiscal policy leads to budget deficit because now expenditure is more than revenue.

Ans. 5 (B) only x and y

X - due to multiplier effect, increase in either consumption, investment or government spending it has multiplier effect on aggregate demand

Y - multiplier effect (k) = 1/ 1-c

where c is MPC. So increase in c increase in multiplier effect.

C = a+cY

where, c is the consumtion which is consume rather tham save.

Z - This statement is false, because due to increase in government spending aggregate demand increases amd so the interest rate. But as interest rate increases investment goes down because now the firm cost will increase im the form of paid loans. So investment will not increase.

Ans 6. (C) only x and z

X - As there is increase in the government spending aggregate demand also increases but in short run increase in the supply is not possible so in long run supply will also increase to meet demand

Crowding effect means increase in government spending in such a way so that interst rate also increases and there would no scope left for private investment.

Hence, Y and Z should be clear now