Principles of Macroeconomics: A Study Guide

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Chapter 9: The Government and Fiscal Policy Multiple Choice
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1. In macroeconomics, the debate over the role of government includes the views of Keynesian economists who believe that: The government is incapable of stabilizing the economy. The government could intervene to smooth out fluctuations in the business cycle, but it is preferable to leave the economy alone and wait for self-correction. The government could increase aggregate expenditure and thereby stimulate aggregate output by manipulating the money supply. The government could increase aggregate expenditure and thereby stimulate aggregate output by manipulating taxes and spending. The government could manipulate consumption and investment to bring the economy out of a recession. 2. All of the following except one are tools of fiscal policy. Which one? Policies regarding the government purchase of goods and services. Policies regarding taxes. Policies regarding transfer payments. Policies regarding the nation's money supply. None of the above. All of the above are tools of fiscal policy.
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3. What is the form of the consumption function when taxes ( T ) create a difference between income ( Y ) and disposable income ( Y d )? C = a + bY + bT C = a + b - T C = a + b ( Y d T ) C = a + bY d - T C = a + b ( Y T ) 4. Refer to the graph below. Assume that there are no taxes in this economy. Y = C + I + G . (The amount of government spending is financed by a gift from Saudi Arabia). What is the value of autonomous expenditures? There is insufficient information to provide an answer.
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200 250 700 1,000 5. Refer to the graph below. Assume that there are no taxes in this economy. Y = C + I + G . (The amount of government spending is financed by a gift from Saudi Arabia). What is the value of equilibrium output ( Y 0 )?
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