Exam 13: Fiscal Policy

Use the dynamic aggregate demand and aggregate supply model and start with Year 1 in a long-run macroeconomic equilibrium. For Year 2, graph aggregate demand, long-run aggregate supply, and short-run aggregate supply such that the condition of the economy will induce the government to conduct contractionary fiscal policy. Briefly explain the condition of the economy and what the government is attempting to do. _____________________________________________________________________________________________ _____________________________________________________________________________________________

Calculate the government purchases multiplier if the marginal propensity to consume equals 0.80, the tax rate is 0.10, and the marginal propensity to import equals 0.20.

The increase in revenue taxation received by the government during an economic boom is due to discretionary fiscal policy.

Increasing government debt relative to GDP does not cause which of the following?

If workers fail to believe that rising inflation will eventually result in comparable increases in wages, but firms do understand this, then there is a:

Long lags associated with the legislative process in implementing fiscal policy can make it more difficult to use than monetary policy.

'Crowding out' will be smaller if:

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

A law requiring the government to balance its budget in each year would serve as an 'automatic destabiliser'.

The Australian federal budget was in surplus during the:

The 'Phillips curve' shows the short-run relationship between:

Government expenditure in Australia as a percentage of GDP has consistently trended upward since the 1960s.

What is 'expansionary fiscal policy' and under what circumstances would it be used? _____________________________________________________________________________________________ _____________________________________________________________________________________________

Government budget deficits can lead to higher real interest rates, which will reduce private investment.

If the government wants to try to reduce unemployment, it could ________ spending and/or taxes should be ________.

If tax reduction and simplification are effective, then:

Suppose that the current equilibrium GDP for a country is $14.5 trillion and that potential GDP is $14.3 trillion. Will decreasing government purchases by $200 billion or raising taxes by $200 billion restore the economy to potential GDP? Briefly explain why. _____________________________________________________________________________________________ _____________________________________________________________________________________________

If 'crowding out' occurs, an increase in government spending:

Suppose the economy is in the state described by the following table. What problem will occur in the economy if no policy is pursued? What fiscal policy tools could be used to combat the problem? Draw a dynamic aggregate demand and supply graph to illustrate the appropriate fiscal policy to use in this situation. _____________________________________________________________________________________________ _____________________________________________________________________________________________

If the economy were in a recession, we would expect government expenditure to be: