Question

1. If the economy is at full employment, increases in government spending: A) have a multiplier effect on equilibrium output. B) have no effect on the aggregate price level. C) are primarily absorbed by price increases. D) reduce aggregate output. 2. Which of the following measures is NOT an example of discretionary fiscal policy? A) The unemployment compensation program pays out more money as unemployment rates rise. B) Tax rates are increased in the hope of slowing down the rate of inflation. C) Tax increases are enacted to reduce the government deficit. D) Government spending is increased to reduce the problems caused by the recession. 3. When government spending increases, the aggregate demand curve shifts to the _ and the multiplier effect is dampened by a_ in the aggregate price level. A) right; fall B) right; rise C) left; fall D) left; rise 4. An expansionary fiscal policy can result in: A) higher unemployment rates. B) inflation and higher GDP. C) lower prices. D) a recession. 5. Suppose policymakers wish to use fiscal policy to fight inflation. Which statement is MOST accurate? A) Using fiscal policy, the government can have the best of both worlds in the form of low inflation and economic growth. Essentially, the way to lower the inflation rate is to decrease aggregate demand and cause a recession. They should not use fiscal policy because in the long run the economy will always go back to its equilibrium. D) Policymakers should use an expansionary policy because jobs are more important than inflation.

Answer 1

1) Select A. This is a part of fiscal expansion that will shift the AD to the right, raising both the price level and the real GDP. Some absorption of GDP takes place via price increase but multiplier effect will be much stronger

2) Select A. Deliberate changes in tax policy or government spending are a part of fiscal discretion but higher unemployment compensation in times of recession is a part of automatic stabilizers

3) Select B. This is a part of fiscal expansion that will shift the AD to the right, raising both the price level and the real GDP. Some absorption of GDP takes place via price increase but multiplier effect will be much stronger

4) Select B

5) Select B