Exam 15: Fiscal Policy

Assume that we want to drive our economy out of recession by generating a $400 billion change in real GDP. The MPC is 0.80. Which of the following policy prescriptions would generate the targeted $400 billion change in income?

Supply-siders' policy recommendations include:

Income tax collections:

To combat a recession, Keynesian fiscal policy recommends:

If the marginal propensity to consume (MPC) is 0.75 and if policy makers wish   to increase real GDP by $300 million to fight a recession, then by how much would taxes have to change?​

Fiscal policy is concerned with:

Unemployment compensation is an example of a(n):

An advantage of automatic stabilizers is that this type of fiscal policy is not subject to:

The Laffer curve is based on the idea that if the tax rate is sufficiently high, then raising it even more will actually reduce total tax revenues. According to Laffer, this happens because the growing tax rates reduce economic activity at an even faster rate.

If the marginal propensity to consume (MPC) is 0.80, and if policy makers wish to increase real GDP $200 billion, then by how much would they have to change taxes?

Supply-side economic policies are designed to shift the aggregate supply curve to the left, whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during economic expansions.

Assume the marginal propensity to consume (MPC) is 0.75 and the government increases taxes by $250 billion. The aggregate demand curve will shift to the:

According to supply-side economists, lowering corporate income taxes:

During the Reagan administration, the Laffer curve was used to ague that:

If your income increases from $33,000 to $41,000 and your consumption increases from $8,000 to $12,000, your marginal propensity to consume (MPC) is:

Assume the marginal propensity to consume (MPC) is 0.75 and the government cuts taxes by $250 billion. The aggregate demand curve will shift to the:

Which of the following is an example of expansionary fiscal policy?

Exhibit 15-2  Aggregate demand and supply model Suppose the economy in Exhibit 15-2 is in equilibrium at point E₁ and the marginal propensity to consume (MPC) is 0.75. Following Keynesian economics, the federal government can move the economy to full employment at point E₂ by:

Supply-side economic policies are designed to shift the aggregate supply curve to the right, whereas Keynesian economic policies focus on shifting the aggregate demand curve to the right during recessions and to the left during an economic expansion.

Mathematically, the value of the spending multiplier in terms of the marginal propensity to consume (MPC) is given by the formula: