ECON 2301 (Exam 4)

ECON 2301 (Exam 4) - ECON 2301-Exam 4 1 Which of the...

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ECON 2301-Exam 4 1. Which of the following would be an example or result of expansionary fiscal policy in action? A) an increase in taxation B) a decrease in government purchases C) a budget deficit D) a decrease in transfer payments E) a budget surplus 2. If the marginal propensity to consume is 0.8, the marginal propensity to save is: A) 0.8 B) 0.4 C) 0.2 D) 0.3 E) Data insufficient Feedback: MPC + MPS = 1. 3. If MPC = 0.8, a $200 billion increase in government purchases would have what size effect on the "first round" of induced added consumption, and what total effect on AD? A) increase "first round" consumption by $80 billion; increase AD by $400 billion B) increase "first round" consumption by $160 billion; increase AD by $1 trillion C) increase "first round" consumption by $200 billion; increase AD by $1 trillion D) increase "first round" consumption by $800 billion; increase AD by $4 trillion Feedback: When the government initially spends the $200 billion, AD increases by that amount. Next, 0.8 x $200 billion = $160 billion will be the added consumption of the first round of induced additional consumption. The total increase to AD = $200 billion x 1/(1-MPC) = $200 billion x 1/0.2 = $200 billion x 5 = $1 trillion. 4. Figure 26-1 Refer to Figure 26-1 . If the economy is at full employment real GDP, expansionary fiscal policy, which increases aggregate demand from AD 0 to AD 1 , will result in the new short-run equilibrium: A) E 2 and RGDP 1. B) E 2 and RGDP NR. C) E 1 and RGDP 1. D) E 0 and RGDP NR. 5. If government policy makers were worried about the inflationary potential of the economy, which of the following would be a correct fiscal policy change? A) Decrease consumption taxes. B) Decrease government purchases of goods and services. C) Increase transfer payments. D) Increase the budget deficit. E) None of the above. Feedback: Contractionary fiscal policy is called for in this situation. A decrease in G is contractionary. The other choices are expansionary. 6. You are a member of Congress when the economy is in a recession. If your goal is to achieve a fully employed labor force, which of the following fiscal policy scenarios should you follow? A) Eliminate a federal budget deficit or add to a federal budget surplus. B) Raise government purchases, reduce taxes, and/or increase transfer payments. C) Decrease government purchases, increase taxes, and/or cut transfer payments. D) Raise government purchases, raise taxes by more than the increase in government purchases, and decrease transfer payments. 7. Starting from long-run equilibrium and a balanced budget, expansionary fiscal policy will tend to:
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A) move the federal budget toward surplus and increase net exports.
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ECON 2301 (Exam 4) - ECON 2301-Exam 4 1 Which of the...

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