Question

Which of the following statements is (are) correct?
(x) The multiplier effect tends to make aggregate demand shift further to the right than the amount by which government expenditures increase.
(y) The government builds a new water-treatment plant. The owner of the company that builds the plant pays her workers. The workers increase their spending. Firms from which the workers buy goods increase their output. This type of effect on spending illustrates the multiplier effect.
(z) The investment accelerator occurs when an increase in government expenditures increases aggregate spending so that Burgerville finds it profitable to build more new restaurants.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Which of the following policies would someone recommend if they want the government to follow an active stabilization policy?
(x) If there is a reduction in investment demand that causes aggregate demand to shift, then the government should increase spending or reduce taxes if the government wants to stabilize output.
(y) If the economy is experiencing unemployment above the natural rate, then the government should decrease the money supply
(z) If Congress raises taxes to balance the federal budget, the Fed can act to prevent unemployment and recession while maintaining the balanced budget by selling bonds to stabilize output.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

According to supply-side economists, which of the following statements is (are) correct?
(x) A reduction in the tax rate provides an incentive for people to work more and the increased work effort causes production to increase.
(y) If the government cuts the tax rate, workers get to keep more of each additional dollar they earn, so work effort increases, and the aggregate supply curve shifts to the right
(z) A reduction in the tax rate always increases government tax revenue.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

1) ans: b) so both (x) and (y) options are right

multplier effect denotes how a change in government expenditure increases the national income multiple times the government expenditure. A change in government expenditure, will cause the rise in income multifolds, through the people whoever recieve the income through government action will again spend it.

2) ans: c) X and Z

Stabilization policies are taken by government through either monetary and fiscal policies to stabilize output and employment and inflation.

only (x) is right because if there is lack of demand in the economy increase government expenditure or cut down the taxes will have multiplier effect and boost the demand

Z is suggested by few, because increase in fed budget and thus selling the output will increase the money supply in the economy due to which the rate of interest falls and output will stabilize

3) ans:B) X and Y

Supply side economics believes in increase in production will in turn create demand and boost the economy, both X and Y suugest it will increase the production. In y, workers incentive to remain in workforce will increase thus the production will increase.