Exam 16: The Influence of Fiscal Policy on Aggregate Demand

The main criticism of those who doubt the ability of the government to respond in a useful way to the business cycle is that the theory by which money and government expenditures change output is flawed.

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

This question considers how an economy changes over time and how the aggregate demand and supply model treats the time dimension of an economy. a) How do the aggregate-demand and aggregate-supply curves shift over time? b) Related to point a, identify and discuss the limitations to the simple, "static" aggregate-demand and aggregate-supply model. What are the consequences of predicting phenomena that have a time dimension (remember the 'short-run' and 'long-run' distinction) using an essentially static model? c) How could the static model be changed to better incorporate the time dimension of the economic variables it tries to explain?

When Parliament reduces spending in order to balance the budget, what does it need to consider?

Suppose the economy is in long-run equilibrium. Parliament passes regulations that make it more costly to conduct business, so the long-run aggregate-supply curve shifts $80 billion to the left. At the same time, government purchases increase by $60 billion. If the MPC equals 0.8 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?

In principle, the government could increase government expenditures to try to offset the effects of a wave of pessimism about the future of the economy.

If the MPC is 0.4, 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?

What tends to make the size of a shift in aggregate demand resulting from a tax change smaller than otherwise?

According to the crowding-out effect, how does a decrease in government spending affect the interest rate and investment spending?

If the MPC is 0.6, what is the multiplier?

If the MPC is 0.75 and there are no crowding-out or accelerator effects, an initial increase in AD of $100 billion will eventually shift the AD curve to the right by how much?

The multiplier is equal to MPC/(1 - MPC).

What is the most likely effect of an increase in government spending on goods to build or repair infrastructure?

If households view a tax cut as being temporary, how does the tax cut affect aggregate demand?

Assume that the MPC is 0.75. Assuming only the multiplier effect matters, how will an increase in government purchases of $200 billion shift the aggregate demand curve?

If the MPC = 0.5 and the MPI = 0.3, what is the government purchases multiplier in an open economy?

Suppose that there are no crowding-out effects and the MPC is 0.8. By how much must the government increase expenditures to shift the aggregate-demand curve right by $10 billion?

Which of the following best defines the multiplier effect?

If the MPC = 0.6 and the MPI = 0.25, what is the government purchases multiplier in an open economy?

During expansions, what do automatic stabilizers make government expenditures and taxes do?