midterm_2 key - University of California Davis Department...

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Page 1 of 9 University of California, Davis Department of Economics ECN 1B Midterm Examination 2 Spring Quarter 2009 B. Modjtahedi Question 1 Which of the following statements is most accurate according to the model we discussed in class? A. A one-time reduction in taxes (say through tax rebates) is more effective to stimulate consumption spending than a permanent reduction in taxes because households consume out of their current incomes. B. A one-time reduction in taxes (through tax rebates) is less effective than a permanent reduction because it does not affect future disposable incomes. C. A permanent reduction in taxes does not have a very strong effect on consumption spending because it results in more saving than consumption. D. A one-time reduction in taxes would have a very strong effect on both consumption spending and investment spending through its effect on expected future disposable income. E. None of the above. Question 2 Which of the two fiscal policy instruments has a more certain effect on aggregate demand, a change in G or a change in T, and for the reason given (Note that the question is not about the size of the effect, but the certainty about the effect)? Question 3 What do you think would most probably happen to the expenditure multiplier in a recession, and for the reason given?
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Page 2 of 9 Question 4 Suppose the expenditure multiplier is 5. If someone breaks the window of a barbershop and the owner of the barbershop spends $100 to replace it, this will cause the real GDP to increase by $500. Is this statement true or false (for the reason mentioned in the following)?
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