Exam 16: The Influence of Fiscal Policy on Aggregate Demand

In a small open economy with perfect capital mobility, if the exchange rate is flexible, what would be the effect of an expansionary monetary policy?

The "Coyne Affair," which occurred in 1961, is a good example of which of the following?

Which statement do opponents of active stabilization policy believe?

According to most economists, what will a cut in tax rates do?

Assume that the MPC is 0.8. Assuming that only the multiplier effect matters, how will a decrease in government purchases of $150 billion shift the aggregate demand curve?

Permanent tax cuts have a larger impact on consumption spending than temporary ones.

Suppose that the MPC is 0.5 and there is no investment accelerator or crowding-out effects. If government expenditures increase by $200 billion, what happens to aggregate demand?

If the MPC is 0, what is the multiplier?

As the MPC gets close to 1, what does the value of the multiplier approach?

If the MPC = 3/4, what is the government purchases multiplier?

Which statement do opponents of active stabilization policy believe?

According to supply-side theories, what happens if the government cuts the tax rate?

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate supply curve $60 billion to the right. At the same time, government purchases increase by $40 billion. If the MPC equals 0.75 and the crowding-out effect is $160 billion, what would we expect to happen in the long-run to real GDP and the price level?

If the MPC is 0.6 and government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Which policy would Keynes's followers support when an increase in business optimism shifts the aggregate demand curve to the right away from long-run equilibrium?

Consider the income-expenditure identity in a closed economy, Y = C + I + G. Suppose consumption is always a fraction MPC of income, C = MPC×Y. a. Show that income Y is equal to (I + G)/(1 - MPC). b. Show that an increase in G by an amount ÄG increases income by ÄG/(1 - MPC) when investment is considered constant with respect to Y. What is the ratio 1/(1 - MPC) called?

If the MPC = 0.8, what is the government purchases multiplier?

If there are automatic stabilizers but no deliberate action by policymakers, how would government expenditures and taxes change as output falls?

If the multiplier is 5, what is the MPC?

The most important lag for monetary policy is the time it takes to formulate policy, while the most important lag for fiscal policy is the time it takes for the economy to respond to changes in government spending.