Assume the marginal propensity to consume (MPC) is o.75 and the government cuts
ID: 1116542 • Letter: A
Question
Assume the marginal propensity to consume (MPC) is o.75 and the government cuts taxes by $250 The aggregate demand curve will shift to the: a. left by $750 billion. b. left by $1,000 billion. c. right by $1,000 billion. d. right by $750 billion. When the economy enters a recession, automatic stabilizers create: a. budget surpluses. b. higher taxes c. more discretionary spending. d. budget deficits. According to supply-side fiscal policy, reducing tax rates on wages and profits will: a. result in stagflation. b. reduce both unemployment and inflation. c. lower the price level but may trigger a recession. d. create demand-pull inflation. 11. 12. 13. 14. Keynesians a. focus on increasing aggregate demand in order to stimulate the economy b. accept the fact that policymakers should eliminate inflation first before focusing on unemployment. were prepared for the events that beset our economy in the 1970s and 1980s. believe that the level of aggregate demand in the 1930s was sufficient to generate full employment. accept the countercyclical policy of doing nothing, that is, allowing market forces to work. c. d. e. 15. According to the crowding-out view, budget deficits will: a. b. c. d. increase interest rates and retard private investment. reduce interest rates. reduce the investments of foreigners in the United States. increase the capital stock available to future generations.Explanation / Answer
11.
D
Working note:
Tax multiplier = MPC/MPS = .75/(1-.75) = 3
Change in aggregate demand due to tax cut of $250 billion = 250*2 = $750 billion
Hence, the aggregate demand will shift to the right by $750 billion due to the tax cut of $250 billion.
12.
B
Automatic stabilizers are unemployment benefits and subsidies that will be disbursed more to the people during the recession. As a result, the budget deficit will increase.
13.
B
The reduction in unemployment and inflation take place due to the given nature of the fiscal policy.
14.
A
Keynesians proposes the significant government interventions to stimulate the aggregate demand that will fuel the economy.
15.
A
Due to crowding out effect, less funds for the private firms will be available. It will cause the interest rate to increase. It will act as discouragement to the private firms and private investment will come down.
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