Question

Suppose the unemployment rate is currently 4.0% and the government engages in contractionary fiscal policy. Using Keynesian economics, what will happen to RGDP?

a.RGDP will decrease

b.RGDP will increase

c.RGDP will not change

d.RGDP could decrease or stay the same

e.RGDP could increase or stay the same

6)Suppose the unemployment rate is currently 4.0% and the government engages in expansionary fiscal policy. Using Keynesian economics, what will happen to RGDP?

a.RGDP will decrease

b.RGDP will increase

c.RGDP will not change

d.RGDP could decrease or stay the same

e.RGDP could increase or stay the same

7)Suppose the government is engaging in dramatic expansionary fiscal policy. What can we assume will happen to interest rates on home mortgages, as a result? (Hint: consider the effects of government borrowing)

a.Interest rates will increase

b.Interest rates will stay the same

c.Interest rates will decrease

8)I live in a country that has an income tax system. This income tax system does not change between 2018 and 2020. However, my income has been increasing. In 2018, I earned $10,000 and I was taxed $4,000. In 2019, I earned $20,000 and was taxed $6,000. In 2029, I earned $30,000 and was taxed $7,000. This is a __________ tax system. (Hint: consider the effective tax rate)

a.Proportional

b.Progressive

c.Regressive

Answer 1

1. Option A

Contractionary fiscal policy decreases the level of aggregate demand, either through cuts in government spending or increases in taxes. As a result Real GDP falls.

2. Option B

Expansionary Fiscal Policy occurs whwn government cut tax rates or increase government spending thus increasing aggregate demand. As a result Real GDP rises.

3.Option A

Expansionary Fiscal Policy which involves increase in government spending will result in increase in demand for lonabale funds but supply remain constant. As a result interest rate goes up.Since government borrows more money it will force interest rate go up.

4. Option C

2018 Tax Rate = 4000 / 10000 = 40% . Tax in 2018 is 4000 and income is 10000

2019 First 10000 tax @ 40% = 4000. Next 10,000 @ 20% = 2000. Tax in 2019 is 6000 and Income is 20000.

2020 First 10000 tax @ 40% = 4000. Next 10,000 @ 20% = 2000. Remaining 10000 @ 10% = 1000. Total tax is 7000 and Income is 30000.

As the taxable income is increasing, the rate of tax is decreasing. So, this is regressive tax.