midterm_2 key

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 reba tes) is less e f fec t ive 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)? A. A change in G, because G is directly an expend iture item but T affects AD indirectly through C. B. A change in G, because the products the government buys are generally more conducive to GDP growth than those that households buy. C. A change in T, because T directly affects household income and consumption while the effect of G on consumption is indirect. D. A change in T, because households can make more efficient purchase plans than the government. E. All of the above. Question 3
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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)? A. It is true. This is no different than a firm increasing investment spending by $100. B. It is true. That $100 is a part of aggregate expenditure. So it will set off the multiplier process. C. It is false. The expenditure multiplier applies only to government’s expenditure and tax policies. D.
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This note was uploaded on 11/11/2011 for the course ECN 1B taught by Professor Michalowski during the Spring '11 term at UC Davis.

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midterm_2 key - University of California Davis Department...

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