Question

Answer the next 7 questions.

44. In an open economy, what would be the long-run effect on a country’s exchange rate (e), i.e., the strength of its currency, of a simultaneous reduction in personal taxes (T↓) and reduction in the money supply (M↓) designed to leave real GDP the same (Y = Y_f)? Up, Down, or Same?
45. In an open economy, what would be the long-run effect on net exports (NX) of a simultaneous reduction in personal taxes (T↓) and reduction in the money supply (M↓) designed to leave real GDP the same (Y = Y_f)? Up, Down, or Same?
46. Stabilization policy, also known as demand management, is designed to shift the aggregate demand curve (AD) back toward potential GDP (Y_f) when actual GDP (Y) deviates significantly from Y_f in either direction. True or False?
47. Following a temporary adverse supply shock, demand management (stabilization policy) can be employed to sustainably restore the original (pre-shock) level of GDP. True or False?
48. Starting from full-employment (Y = Y_f), capital formation is promoted by policies that reduce either consumption or government purchases. True or false?
49. If the government budget is in deficit, but the economy is in recession (Y < Y_f), then it is possible that there is a structural budget surplus. True or False?
50. A tax system for which taxes (T) are related to income (Y) by the formula T = -1000 + .25Y would be considered a proportional tax system due to the constant nature of the marginal tax rate. True or False?

Answer 1

a decrease in tax will increase in personal disposable income (Cd)

while a decrease in money supply will increase interest rate hence reduce private investment I

A. It will increase import owing to increase in Cd and so enhance the demand for foreign currency so increase in exchange rate domestic currency per unit of foreign currency.

B. it will cause trade deficit with lower export due to low investment and higher import due to higher disposable income.

C. True, Stabilization policy aims to stabilize the economy at full employment as above full demand ill cause price to rise and lower-level form full employer will cause lower output, so optima are at full employment.

D. False, temporary adverse supply shock will be affected by supply-side factor like oil price shock or productivity shock, labour market problem can not be managed by demand management.

E. True, any change in the comment of C, I, G NX will be offset by others with y=Yf, so investment in the private sector either reduce consumption of GE.

F. False, at lower than full employment deficit will cause an increase in income so the economy will expand and scope for the deficit to assimilated in an economy so no surplus. at full employment govt deficit will results in more taxes and interest so it will have some structural surplus in some part.

G. true, a proportional tax means fixed proportion increase in tax with income base means tax rate is fixed at every amount of tax base.