CB2402 Macroeconomics

Self-study Exercise - Week 8

Chapter 27 Fiscal Policy

1) If the economy is falling below potential real GDP, which of the following would
be an appropriate fiscal policy to bring the economy back to long-run aggregate
supply? An increase in
A) the money supply and a decrease in interest rates.
B) government purchases.
C) oil prices.
D) taxes.

Figure 27-1

2) Refer to Figure 27-1. An increase in taxes would be depicted as a movement from

________, using the static AD-AS model in the figure above.
A) E to B
B) B to C
C) A to B
D) B to A
E) C to D
Figure 27-7

3) Refer to Figure 27-7. Given that the economy has moved from A to B in the graph
above, which of the following would be the appropriate fiscal policy to achieve
potential GDP?
A) increase taxes
B) increase government spending
C) contractionary fiscal policy
D) decrease interest rates

Table 27-4

Year Potential Real GDP Real GDP Price Level

2016 $18.0 trillion $18.0 trillion 150
2017 18.5 trillion 18.8 trillion 154

4) Refer to Table 27-4. Consider the hypothetical information in the table above for
potential real GDP, real GDP, and the price level in 2016 and in 2017 if Congress and
the president do not use fiscal policy. If Congress and the president use fiscal policy
successfully to keep real GDP at its potential level in 2017, which of the following
will be lower than if Congress and the president had taken no action?
A) real GDP and the unemployment rate
B) real GDP and the inflation rate
C) real GDP and potential GDP
D) potential GDP and the inflation rate
5) What is the government purchases multiplier if the tax rate is 0.2 and the marginal
propensity to consume is 0.8? Assume the economy is closed.
A) 2.78
B) 5
C) 6.25
D) 100

6) An increase in government purchases of $200 billion will shift the aggregate

demand curve to the right by
A) $200 billion.
B) less than $200 billion.
C) more than $200 billion.
D) None of the above are correct. This policy shifts the long-run aggregate supply
curve.

7) The impact of crowding out may be the least

A) during a deep recession.
B) when real GDP is above but close to potential GDP.
C) during an expansion.
D) when real GDP is below but close to potential GDP.

8) An economic expansion tends to cause the federal budget deficit to ________

because tax revenues ________ and government spending on transfer payments
________.
A) increase; rise; falls
B) increase; fall; rises
C) decrease; rise; falls
D) decrease; fall; rises

9) A decrease in which of the following would decrease the tax wedge?

A) marginal tax rate
B) money supply
C) national debt
D) federal budget deficit

Answer to Self-study Exercise – Week 8

MCQ Answer
1 B
2 D
3 B
4 B
5 A
6 C
7 A
8 C
9 A