Fiscal Policy

1. According to Keynes, if aggregate demand is too high and an inflationary gap is beginning to develop in the economy, fiscal policy should be contractionary.

True

False

3. The elimination of automatic stabilizers would most likely increase the need for more fiscal policy prescriptions.

True

False

6. Suppose the U.S. economy is in a recession, and the recessionary gap is equal to $250. If the mpe is 0.80, how much should the government spend to eliminate the recessionary gap?

A. Increase spending by $250.

B. Increase spending by $125.

C. Increase spending by $50.

D. Increase spending by $25.

7. Based upon what we have learned in this chapter, the best way to help reduce/eliminate an inflationary gap and decrease the economy's equilibrium income down to its potential income level is to:

A. increase aggregate expenditures by a government spending decrease or a tax increase.

B. increase aggregate expenditures by a government spending increase or tax decrease.

C. decrease aggregate expenditures by a government spending increase or tax decrease.

D. decrease aggregate expenditures by a government spending decrease or tax increase.

8. If the mpe is equal to 0.90 and equilibrium income is $300 billion more than potential income, the Multiplier Model predicts that potential income can be attained by ______________ government spending ___________________.

A. decreasing; by $300 billion

B. decreasing; by $90 billion

C. decreasing; by $60 billion

D. decreasing; by $30 billion