Section 1: Multiple Choices 50x1-50 Marks 1. All of the following, except one, w

Question

Section 1: Multiple Choices 50x1-50 Marks 1. All of the following, except one, would cause the aggregate demand curve to shift to the right. Which is the exception? A) An increase in taxes B) An increase in government spending on goods and services C) An increase in the money supply D) A decrease in the exchange rate 2. What is the crowding-out effect? A) The idea that when a government borrows to finance a deficit, it crowds out private investment because it causes interest rates to fall. B) The idea that when a government borrows to finance a deficit, it crowds out private investment because it causes interest rates to rise. C) The idea that fiscal policy crowds out economic growth. D) The idea that balanced budgets crowd out economic growth 3. Graphically, what would cause the aggregate demand curve to shift to the right? A) An increase in taxes. B) A decrease in government spending on goods and services C) An increase in net tax revenues D) Counter-cyclical fiscal policy and a recessionary gap. E) Counter-cyclical fiscal policy and an inflationary gap. 4. How might the crowding out effect be avoided? A) B) C) By the central bank contracting the money supply at the same time that the fiscal authorities increase spending. By the central bank expanding the money supply at the same time that the fiscal authorities increase spending. By the fiscal authorities lowering taxes as spending increases. By the fiscal authorities raising taxes as spending increases. D)

Explanation / Answer

1. A . An increase in taxes will reduce consumer spending and cause AD to shift to the left.

This is correct

Choice B is wrong because an increase in government spending will cause AD to shift to the right (increase)

Choice C is wrong because increase in money supply will cause increase in consumer spending and cause AD to increase.

Choice D is wrong because a decrease in exchange rate would cause exports to increase and the AD will increase.

Question 2

B. When government borrows to meet its budget deficit, it crowds out private investment because demand for money exceeds supply ( if money supply is fixed) , leading to increase in interest rates.

Question 3

D. Counter cyclical fiscal policy during recession is to lower taxes for consumer spending to increase.

Question 4

B. Increase in money supply will lead to lower interest rates. Firms will expand output leading to increase in income and savings.

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