11)Contractionary fiscal policy a)is designed to increase aggregate demand. b)Is
ID: 1151790 • Letter: 1
Question
11)Contractionary fiscal policy
a)is designed to increase aggregate demand.
b)Is designed to decrease aggregate demand.
c)Is designed to increase aggregate supply.
d)Is designed to decrease aggregate supply.
e)a, and c.
12)Expansionary fiscal policy
a)leads to an increase in a country’s output.
b)Leads to a reduction in a country’s output.
c)Increases the inventories below the desired level.
d)b and c.
e)a and c.
13)An inflationary gap can theoretically close on its own because.
a)Aggregate supply will gradually shift to the right as input prices decrease in the time of inflation.
b)Aggregate demand will gradually shift to the right as input prices decrease in the time of inflation.
c)Aggregate demand will gradually shift to the left as input prices increase in the time of inflation.
d)Aggregate supply will gradually shift to the left as input prices increase in the time of inflation.
e)None of the above.
14)Let c=0.8. Then
a)A 10 dollar increase in disposable income will increase consumption by 2 dollars.
b)A 10 dollar increase in disposable income will decrease consumption by 8 dollars.
c)A 10 dollar increase in disposable income will increase consumption by 8 dollars.
d)A 10 dollar decrease in disposable income will decrease consumption by 8 dollars.
e)c and d.
15)Let c=0.9. Then
a)A 10 dollar increase in disposable income will increase saving by 1 dollar.
b)A 10 dollar increase in disposable income will increase consumption by 9 dollars.
c)A 10 dollar increase in disposable income will increase consumption by 90 cents.
d)A 10 dollar decrease in disposable income will decrease consumption by 1 dollar.
e)a and b.
Explanation / Answer
11) A contractionary fiscal policy includes raising taxes and reducing government spending. It is primarily designed to decrease aggregate demand because it has a much more direct impact on AD than AS, however it can also affect the AS although it takes time to do so. Hence the correct answer is (B) i.e designed to decrease aggregate demand.
12) Expansionary fiscal policy incudes lowering taxes and increasing government spending. It leads to an increase in country's output. Hence the correct answer is (A).
13) An inflationary gap can theoretically close on its own because aggregate supply will gradually shift to the left as input prices increase in the time of inflation. Hence the correct answer is (D).
14) An MPC of 0.8 means that a change in income of $10 would lead to a change in consumption of $8. Hence the correct answer is (E) i.e both (c) and (d).
15) An MPC pf 0.9 means that an increase in income of $10 would lead to an increase in consumption of $9 and an increase in saving of $1. Hence the correct answer is (E) i.e both (a) and (b).
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