Exam 16: The Influence of Fiscal Policy on Aggregate Demand

The economy is in long-run equilibrium when the government decides to significantly increase spending on transportation infrastructure, which will lower shipping costs for many businesses. What might we expect in the short run and the long run to happen to real GDP and the price level?

How do permanent tax cuts shift the AD curve compared with temporary tax results?

According to most economists, what does fiscal policy affect?

Suppose that the government spends more on transportation systems like roads, rail lines, and airports. What does this do to aggregate demand? How is your answer affected by the presence of the multiplier, crowding-out, and investment-accelerator effects?

Unemployment insurance and welfare programs work as automatic stabilizers.

Suppose the closed economy is in long-run equilibrium. Technological change shifts the long-run aggregate-supply curve $80 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 $70 billion, what would we expect to happen in the long-run to real GDP and the price level?

Which of the following factors mostly determines the lag problem associated with monetary policy?

Assuming the multiplier effect but no crowding-out or investment-accelerator effects, what is the effect of a $500 billion increase in government expenditures on the aggregate demand?

What did Keynes argue about aggregate demand?

Suppose that consumers become pessimistic about the future health of the economy, and so cut back on their consumption spending. What will happen to aggregate demand and to output? What might the government have to do to keep output stable?

Figure 16-1 -Refer to Figure 16-1. In a closed economy, what would cause the aggregate demand curve to shift from AD to AD*?

Which term refers to the positive feedback from aggregate demand to investment?

In a small open economy with perfect capital mobility, if the Bank of Canada chooses to fix the value of the Canadian dollar, what will a contractionary monetary policy do?

If an individual's income increases from $500 to $700 and their spending increases by $150, what is the marginal propensity to consume?

During recessions, how do automatic stabilizers change government deficit and taxes?

If the Bank of Canada chooses to prevent any change in the exchange rate when government spending increases, what is most likely to happen?

If an individual's income increases from $500 to $700 and their spending increases by $120, what is the marginal propensity to consume?

Assume that the MPC is 0.8. Assume that the total crowding-out effect is $20 billion. How will an increase in government purchases of $9 billion shift the AD curve?

Which policy would someone who wants the government to follow an active stabilization policy recommend when the economy is experiencing unemployment above the natural rate?

If the Bank of Canada allows the exchange rate to vary freely, which effect will an expansionary fiscal policy have?