QUESTION 6 In the traditional Keynesian model, if the government increases spend

Question

QUESTION 6

In the traditional Keynesian model, if the government increases spending, then

both real Gross Domestic Product (GDP) and the price level will rise.

real Gross Domestic Product (GDP) will increase and the price level will fall.

real Gross Domestic Product (GDP) will rise and the price level will remain constant.

real Gross Domestic Product (GDP) will remain constant and the price level will rise.

0.42 points   

QUESTION 7

Supply-side economists argue that

lower tax rates lead to a drop in real Gross Domestic Product (GDP).

lower tax rates always lead to lower tax revenues.

lower tax rates sometimes lead to increased tax revenues.

higher tax rates lead to increased productivity.

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QUESTION 8

The traditional Keynesian approach to fiscal policy assumes that

cutting taxes is a more effective way to stimulate the economy than is increasing government spending.

the effect of unemployment compensation is to destabilize the economy.

an equal income distribution ensures a stable economy.

consumers spend more when their incomes are higher.

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QUESTION 9

Discretionary fiscal policy

can be very effective in influencing real GDP during abnormal times, such as when a nation is at war.

may reassure investors and consumers that the federal government will be able to avert a major economic downturn.

is not very effective in influencing real GDP during normal times because of time lags.

all of the above

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QUESTION 10

Which of the following best explains why the federal tax rebates in 2008 and 2009 had almost no effects on aggregate demand?

According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending.

According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur.

According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income.

According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets.

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QUESTION 11

During which time will fiscal policy be the most effective?

In the middle of expansions

Times of war

Times of stagflation

Normal times

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QUESTION 12

During normal times, discretionary fiscal policy

is more effective in influencing real GDP than automatic stabilizers.

is probably not very effective in influencing real GDP due to time lags.

works well because there are no lag problems in influencing real GDP.

is more effective in influencing real GDP than at times of a recession.

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QUESTION 13

Supply-side economists argue that changes in tax rates cause changes in

saving.

the full-employment level of output.

labor supply.

all of the above.

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QUESTION 14

Whenever government spending is a substitute for private spending

there is a direct multiplier effect.

the effects of expansionary fiscal policy are dampened.

interest rates will rise.

the Ricardian equivalence theorem holds.

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QUESTION 15

Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct?

Real GDP will fall the same in both economies.

Real GDP will fall more in economy B than in economy A.

Real GDP will fall more in economy A than in economy B.

The effect on the relative size of the reduction in real GDP in the two economies is ambiguous.

both real Gross Domestic Product (GDP) and the price level will rise.

real Gross Domestic Product (GDP) will increase and the price level will fall.

real Gross Domestic Product (GDP) will rise and the price level will remain constant.

real Gross Domestic Product (GDP) will remain constant and the price level will rise.

Explanation / Answer

Question 6:

The first option in correct.

Keynes argued that increase in government expenditure would lead to an increase in the overall economic activity, which would help in recovering from depression and unemployment. Hence, both real GDP and price level will increase.

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