Question

1. A tax cut to the tax rates may not stimulate the economy if:

a)It is permanent and increases permanent disposable income

b) decisions for consumption are based only on current income instead of permanent income

c) it is distributed evenly in the population of the economy

d) it is temporary and thus doesn't change the permanent disposable income

e) It is too big

2. An economy that is headed into recession decides to start an expansionary fiscal policy. 6 months later when the policy is started, there is low unemployment. What happens after this?

a) expansionary fiscal policy causes price levels to decrease

b) expansionary fiscal policy causes the LRAS curve to shift to the right

c) expnasionary fiscal policy causes the LRAS curve to shift the left

d) The economy is still in recession because it's only been 6 months, but the expansionary policy will pull it out of the recession

e) expansionary fiscal policy causes initial rise in Ad, which causes the AS to lower.

3. If an economy is very close to the full employment level of outputs, the AD/AS analysis of changes in gov. spending and/or taxing will be different when compared to the Keynesian model

a)True

b) False

4. Why is fiscal policy rarely used today?

a) Because people think it will cause inflation

b) people don't trust the government

c) There is a large level of national debt

d) The Government doesn't have a fast reaction time

e) All of these

5. How does the government borrow money?

a) They go to the world bank

b) They issue loans (T bonds)

c) They go to normal banks

d) They sell their assets

e) They print more money

6) Before 1980, the government ________ ran a budget deficit

a) couldn't

b)always

c)never

d) usually

e) sometimes

Answer 1

(1) (d)

If consumption decisions are based only on change in permanent income and not on change in temporary income (caused by a tax cut), then the tax cut will not increase consumption much since it will not increase permanent disposable income.

(2) (e)

Initial increase in AD will shift AD curve rightward, increasing price level in short run. In long run, higher price level will increase cost of inputs, so firms will lower production and output. Aggregate supply will decrease and Short run AS curve will shift leftward.

(3) True

When an economy is very close to full employment, the AS curve is nearly vertical and the short-run (Keynesian) analysis will be different than the economic analysis in this situation.

(4) (c)

Expansionary fiscal policy is implemented by increased government spending and/pr reduces taxes, both of which will increase budget deficit, thus will increase the national debt. Since level of national debt is already too high, government wants to minimize the use of fiscal policy.

NOTE: As per Answering Policy, 1st 4 questions are answered.