Why does a larger government budget deficit increase the magnitude of the crowding-out effect? 

1.
Explain what effect an expansionary fiscal policy would have on the
price level and real GDP starting from full employment equilibrium. (4
Marks)

2.
Why does a larger government budget deficit increase the magnitude of
the crowding-out effect? (4 Marks)
3.
How does the multiplier work and what might government use it for? (5
Marks)

4.
Explain what effect a contractionary fiscal policy would have on the
price level and real GDP starting from full employment equilibrium. (4 Marks)
5.
What are automatic stabilizers and how do they affect the economy? Which
is the most important? (5 Marks)
6.
Suppose government spending increases in a closed economy. Would the
effect on aggregate demand be larger if the Bank of Canada took no action in
response, or if the Bank were committed to maintaining a fixed interest rate?
Explain (6 Marks)
7.
Suppose that a scientific breakthrough leads to the discovery of a new
cheap source of energy. What would be the effect of this invention in the
short-run and in the long-run? (5 Marks)
8.
In which of the following circumstances is expansionary fiscal policy
more likely to lead to a short-run increase in investment? Explain (6 Marks)
1.
when investment accelerator is large, or when it is small?
2.
when the interest sensitivity of investment is large, or when it is
small?
3.
when the marginal propensity to import is small, or when it is large?
9.
For various reasons, fiscal policy changes automatically then output and
employment fluctuate. (6 Marks)
1.
Explain why tax revenue changes when the economy goes into a recession.
2.
Explain why government spending changes when the economy goes into a
recession.
3.
If the government were to operate under as strict balanced-budget rule,
what would it have to do in a recession? Would that make the recession more or
less severe?
Multiple Choice Questions – each question is worth 2 Marks
10.
Expansionary fiscal policy consists of:
1.
increased government purchases, increased taxes, increased transfer
payments.
2.
decreased government purchases, decreased taxes, decreased transfer
payments.
3.
increased government purchases, increased taxes, decreased transfer
payments.
4.
increased government purchases, decreased taxes, increased transfer
payments.
11. A sales or excise tax is often considered to be
unfair to which group of citizens?
1.
no one in particular, because it is a proportional tax that treats
everyone the same
2.
lower income groups who pay a greater percentage of their income toward
the tax than do the wealthy
3.
the middle class because they comprise the largest demographic group in
society
4.
upper income people because they have more income
12. Starting at full employment, if MPC = 2/3, an
increase in government purchases of $10 billion would lead AD to ____ and ____
real output in the long run.
1.
increase $30 billion; increase
2.
increase $30 billion; not change
3.
decrease $30 billion; decrease
4.
decrease $30 billion; not change
5.
None of the above.
Figure A
>
13.
Refer to Figure A. In order for the economy pictured above to get back
to RGDPNR, this economy could use:
1.
decreased taxes and increased government purchases.
2.
increased taxes and increased government purchases.
3.
decreased taxes and decreased government purchases.
4.
increased taxes and decreased government purchases.
14. In the short run, expansionary fiscal policy can
cause a rise in real GDP:
1.
in combination with a rise in the price level.
2.
in combination with no rise in the price level.
3.
in combination with a reduction in the price level.
4.
in combination with a rise or a reduction in the price level, depending
on the economy.
15. Starting from long-run equilibrium and a balanced
budget, expansionary fiscal policy will tend to:
1.
move the federal budget toward surplus and increase net exports.
2.
move the federal budget toward surplus and decrease net exports.
3.
move the federal budget toward deficit and increase net exports.
4.
move the federal budget toward deficit and decrease net exports.
16. If the government wanted to offset the effect of a
fall in consumer confidence on AD, it might:
1.
decrease government purchases.
2.
decrease taxes.
3.
decrease transfer payments.
4.
do either a) or c).
17. If investment decreases by $20 billion and the MPC
= 0.8, the resulting decrease in the consumption component of AD is:
1.
$16 billion.
2.
$4 billion.
3.
$100 billion.
4.
$80 billion.
18. To achieve a $50 billion decrease in AD, if the MPC
is 0.8, what decrease in government purchases would be called for?
1.
$10 billion
2.
$40 billion
3.
$50 billion
4.
$62.5 billion
19. The multiplier effect is based on the fact that
____ by one person is ____to another.
1.
income; income
2.
expenditures; expenditures
3.
expenditures; income
4.
income; expenditures
20. If the government wanted to move the economy out of
a current recession, which of the following might be an appropriate policy
action?
1.
decrease taxes
2.
increase government purchases of goods and services
3.
increase transfer payments
4.
any of the above.
21. ____ taxes are designed to take the same percentage
of high incomes as compared to lower incomes.
1.
Progressive
2.
Regressive
3.
Proportional
4.
Negative
22. If the marginal propensity to consume is 2/3, the
multiplier is:
1.
30.
2.
66.
3.
1.5.
4.
3.
23. If the government decides to spend an extra $5
billion on health care that they would otherwise have spent on road
construction, and the MPC = 0.75, what is the effect on AD?
1.
It has no effect.
2.
It increases by $5 billion.
3.
It increases by $15 billion.
4.
It increases by $20 billion.
24. An increase in transfer payments, combined with a
decrease in government purchases, would:
1.
increase AD.
2.
decrease AD.
3.
leave AD unchanged.
4.
have an indeterminate effect on AD.
25. Contractionary fiscal policy consists of:
1.
increased government purchases, increased taxes, increased transfer
payments.
2.
decreased government purchases, decreased taxes, decreased transfer
payments.
3.
decreased government purchases, increased taxes, decreased transfer
payments.
4.
increased government purchases, decreased taxes, increased transfer
payments.
26. The smaller the MPC:
1.
the smaller the fraction of an increase in AD due to an increase in
government purchases that is consumption.
2.
the greater the fraction of an increase in AD due to an increase in
government purchases that is consumption.
3.
the greater the change in government purchases required to achieve a
given change in AD.
4.
both a) and c).
5.
both b) and c).
27. An increase in government purchases or a decrease
in taxes, other things being equal, will tend to:
1.
increase interest rates and increase net exports.
2.
increase interest rates and decrease net exports.
3.
decrease interest rates and increase net exports.
4.
decrease interest rates and decrease net exports.
28. If there is initially a federal budget deficit, and
government purchases and taxes both rise:
1.
AD increases and the budget deficit increases.
2.
AD increases and the budget deficit decreases.
3.
AD decreases and the budget deficit increases.
4.
AD decreases and the budget deficit decreases.
5.
there is an indeterminate effect on both AD and the budget deficit.
29. AD will shift to the right, other things being
equal, when:
1.
the government budget surplus increases because government purchases
rose.
2.
the government budget surplus increases because taxes fell.
3.
the government budget surplus increases because transfer payments rose.
4.
under any of the above circumstances.
5.
under none of the above circumstances.
30. During a recession, total welfare payments and
employment insurance payments automatically increase while income taxes
automatically decrease. Which of the following best describes the effect of
these changes on aggregate demand?
1.
Aggregate demand will be less than it would be without these automatic
stabilizers.
2.
Aggregate demand will be the same as it was before the recession.
3.
Aggregate demand will be more than it would be without these automatic
stabilizers.
4.
Aggregate demand will be greater than it was before the recession.
31. The primary benefit of the automatic stabilizers
is:
1.
they provide public assistance through legislative decision making.
2.
they require no new legislative action, so there is no legislative lag
before these tools respond to fluctuations in the business cycle.
3.
they require legislative action, so there is a lag in response to these
tools to fluctuations in the business cycle, and there is time to identify the
spillover effects.
4.
none of the above.
32. The most important automatic stabilizer is:
1.
open market operations.
2.
the unemployment compensation system.
3.
the tax system.
4.
the welfare system.
33. One of the real-world complexities of
countercyclical fiscal policy is that:
1.
fiscal policy is based on forecasts, which are not foolproof.
2.
there is a lag between a change in fiscal policy and its effect.
3.
there is uncertainty about how much of the multiplier effect will take
place in a given amount of time.
4.
All of the above are correct.
34. According to the crowding-out effect, if the
federal government borrows to finance deficit spending:
1.
the demand for loanable funds will decrease, driving interest rates
down.
2.
the demand for loanable funds will increase, driving interest rates up.
3.
the supply of loanable funds will increase, driving interest rates up.
4.
the supply of loanable funds will decrease, driving interest rates down.
35. A larger crowding-out effect:
1.
increases the magnitude of a given fiscal policy’s effect on interest
rates and increases the magnitude of its effects on investment.
2.
increases the magnitude of a given fiscal policy’s effect on interest
rates and decreases the magnitude of its effects on investment.
3.
decreases the magnitude of a given fiscal policy’s effect on interest
rates and increases the magnitude of its effects on investment.
4.
decreases the magnitude of a given fiscal policy’s effect on interest
rates and decreases the magnitude of its effects on investment.
36. Due to crowding-out effects, other things being
equal:
1.
net exports and investment will tend to move in the same direction as a
change in government purchases.
2.
net exports and investment will tend to move in the opposite direction
from a change in government purchases.
3.
net exports will tend to move in the same direction as a change in
government purchases and investment will tend to move in the opposite
direction.
4.
net exports will tend to move in the opposite direction as a change in
government purchases and investment will tend to move in the same direction.
37. According to the supply-side view of fiscal policy,
if the impact on tax revenues is the same, does it make any difference whether
the government cuts taxes in a way that reduces marginal tax rates or in a way
that does not reduce marginal tax rates?
1.
No; both actions will exert the same impact on aggregate supply and demand.
2.
Yes; only lower tax rates will increase the incentive to earn marginal
income and thereby stimulate aggregate supply.
3.
No; in both cases people will increase their saving in the expectation
of higher future taxes and thereby offset the stimulus effect of lower taxes.
4.
Yes; interest rates will increase if marginal tax rates are lowered,
whereas they will tend to decrease if marginal tax rates are left unchanged.
38. According to the Laffer curve:
1.
decreasing tax rates on income always increases tax revenues.
2.
decreasing tax rates on income always decreases tax revenues.
3.
decreasing tax rates are more likely to increase tax revenues, the
higher tax rates are to start with.
4.
decreasing tax rates are more likely to increase tax revenues, the lower
tax rates are to start with.
39. Which group or groups buy Canadian public debt?
1.
the Bank of Canada
2.
private individuals
3.
private institutions
4.
all of the above
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