Exam 16: The Influence of Fiscal Policy on Aggregate Demand

A city decides to build a new hockey arena. The owner of the construction company that builds the new arena pays their workers. The workers increase their spending. Firms that the workers buy goods from increase their output. What does this type of effect on spending illustrate?

Canada is a small open economy with a flexible exchange rate. Which effect will a contractionary fiscal policy have?

How does an automatic stabilizer interfere with fiscal policy? Discuss possible positive and negative effects.

Suppose the closed economy is in long-run equilibrium. Immigration of skilled workers shifts the long-run aggregate-supply curve $120 billion to the right. At the same time, government purchases increase by $50 billion. If the MPC equals 0.8 and the crowding-out effect is $80 billion, what would we expect to happen in the long run to real GDP and the price level?

How does the multiplier change when the MPC increases, and what is the effect on aggregate demand?

The federal government decides to stimulate the economy and increases government expenditure on new infrastructure projects by $20 billion. The marginal propensity to consume is MPC = 75 and the marginal propensity to import is MPI = .20. Suppose the crowding-out effect is twice the amount of government spending. a. In a closed economy, what is the increase in output caused by the stimulus package of $20 billion? b. What is the increase in output if the economy is open?

How do tax cuts and government expenditure affect aggregate demand?

When the government reduces taxes, all other things being equal, what will decrease?

Which of the following defines the government purchases multiplier in an open economy?

Which of the following defines the government purchases multiplier?

If the multiplier is 10, what is the MPC?

In a small open economy with a flexible exchange rate, what will an expansionary fiscal policy cause?

What effects do supply-side economists believe that lowering taxes have?

What is the term for the fraction of extra income that a household consumes rather than saves?

Why and in what way are fiscal policy lags different from monetary policy lags?

When making a case against active stabilization policies, what do some economists argue?

Both the multiplier and the investment accelerator tend to make the aggregate-demand curve shift farther than the increase in government expenditures.

If the MPC is 0.6, the MPI is 0.2, and the government increases spending by $50 million, what will be the demand for goods and services generated by this increase?

Figure 16-1 -Refer to Figure 16-1. If the closed economy is at point b, which of the following is the best policy to restore full employment?

Assuming the crowding-out effect but no multiplier or investment-accelerator effects, what is the effect of a $600 billion increase in government expenditures on the aggregate demand or supply?