Mr. Beck
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SUNY College at Oneonta
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Review Questions for Chapter 28-Solutions
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Review Questions for Economics
110
1. An increase in transfer payments (such as social security benefits,
unemployment compensation, and welfare) would increase households' disposable
incomes. This would result in an increase in consumption (C).
Since consumption and government spending (G) are
both components of total spending [C + I + G +(X-IM)], a combined
increase in both government spending (G) and transfer payments would
result in the greatest amount of increased spending. The correct answer
is a.
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1
2. The greatest increase in the level of real GDP
(Y) would result from the greatest increase in total spending. Decreases
in government spending (G) and increases in net taxes (T) both involve
decreases
in spending. Therefore, choices b, c , and d all involve a resultant decrease
in the level of real GDP (Y). Choice e involves both an increase in spending
(the increase in G) and a decrease in spending (increase in T), while choice
a
just involves a direct increase in spending (the increase
in government spending, G, by 10). The correct answer is thus a.
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2
3. A decrease in net taxes (T) will increase
disposable income and thus cause consumption to increase. Since government
spending (G) and consumption (C) are both components of total spending,
increasing them both simultaneously would result in the greatest combined
increase in spending and thus in real GDP (Y). This double effect would
be achieved by choice b,
an increase in government spending (G) accompanied
by a decrease in net taxes (T).
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3
4. Inflationary increases in prices are caused by
excess aggregate demand due to excessive spending. The largest increase
in spending will result from choice b,
the
increase in government spending (G) of 10. This is the only choice
which just involves a direct increase in spending. Choice a (an
increase in net taxes, T) and choice d (a decrease in government spending,
G) will both involve a decrease in real expenditures, while choices c and
e both involve a combination of an increase and a decrease in total spending.
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4
5. Supply-side economists believe that tax cuts,
choice a,
will encourage labor to work more hours and will provide incentives for
businesses to increase their investment spending. The result would be an
increase in aggregate supply (shift the entire aggregate supply curve to
the right). This will have the beneficial effect of increasing the economy's
level of real GDP without the accompanying undesirable inflationary price
increases.
6. A decrease in taxes and an increase in transfer
payments will both increase household disposable income and thus cause
an increase in people's ability to consume.
Since both consumption (C) and government spending
(G) are components of total spending, the greatest increase will result
from choice c, an
increase
in government spending (G) accompanied by a decrease in taxes and an increase
in transfer payments.
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6
7. To eliminate inflation, total spending must
decrease. An increase in taxes,
choice c, would
decrease household disposable income and thus succeed in decreasing
consumption (C), the major component of total spending. All of the other
choices would increase total spending, thereby contributing to an increased
inflation rate.
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7
8. A successful supply-side tax cut would encourage
labor to work more hours and will provide incentives for businesses to
increase their investment spending. This will shift the aggregate supply
curve to the right. Since tax cuts increase household disposable income,
tax cuts will increase household consumption spending and shift the entire
aggregate demand curve to the right. Combining shifts in both aggregate
demand and supply to the right results in an increase in the economy's
real GDP without the accompanying undesirable inflationary price increases.
The correct choice is a.
The result is shown as the change from point E to
point N on the graph below:
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8
9. Advocates of smaller government prefer tax cuts
when the economy is in a recession. This will increase consumer demand
and stimulate the economy without requiring any increases in government
spending. When the economy is in an inflationary period, the desired fiscal
policy is to decrease total spending. This would provide a perfect opportunity
to decrease government spending. The decreased government spending would
decrease aggregate demand and help slow down the inflationary price increases
while reducing the influence of government in the economy.
The correct choice is b.
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9
10. A decrease in the level of real GDP (Y)
would result from a decrease in total spending. An increase
in taxes of 10, choice b,
would decrease household disposable income and thus succeed in decreasing
consumption (C), the major component of total spending. All of the other
choices involve either an increase in government spending (G) or a decrease
in taxes, both of which would increase total spending, thus increasing
the level of real GDP (Y).
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10
11. Advocates of larger government prefer increases
in government spending when the economy is in a recession. This will increase
consumer demand and stimulate the economy and provide a perfect opportunity
to increase the extent of government programs. When the economy is in an
inflationary period, the desired fiscal policy is to decrease total spending.
Advocates of larger government do not wish to decrease government spending
so they would choose a tax increase as their preferred policy. The tax
increase would decrease household disposable income and decrease household
consumption spending. The result would be a decrease in aggregate demand
which would help slow down the inflationary price increases, and this would
be done without decreasing government spending.
The correct choice is c.
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11
12. A decrease in real GDP (Y) is caused by
a decrease in total spending [C,I,(X-IM) or G].
An increase in net taxes (T)
will decrease disposable income, thereby decreasing consumption spending
(C). If this is combined with a decrease in government
spending (G), choice c,
the combination will result in a double decrease in spending and would
result
in the greatest decrease in total spending. This would cause the greatest
resultant decrease in the level of real GDP (Y).
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12
13. To increase real GDP without causing undesirable
inflationary price increases, both the aggregate demand and aggregate supply
curves would have to shift to the right. This is shown by the change from
point E to point N on the graph below. Supporters of supply-side economics
claim that a successful tax cut has the potential to achieve this desirable
result. The correct choice is a.
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13
14. A recession occurs when the economy's level
of real GDP (Y) is well below its full employment capacity.
To eliminate the recession, the level of real GDP
(Y) must increase. An increase in the level of real GDP (Y) requires
an increase in total spending [C,I,(X-IM) or G]. A decrease in net taxes
(T) will increase household disposable income and thus cause consumption,
the largest component of total spending, to increase.
This will cause a resultant increase in real GDP (Y) and help eliminate
the recession. The correct choice is d.
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14
15. An increase in net taxes (T) will decrease
household disposable income. This in turn will reduce households' ability
to both consume and save. Since consumption, the major component of the
economy's total spending, is decreasing, the resultant level of real GDP
(Y) will decrease.
The amount of the government budget deficit = Amount
by which G > T. Increasing taxes will decrease the amount by which government
spending (G) exceeds net taxes (T), thereby decreasing the size of the
budget deficit.
None of the
above will increase and the correct answer is choice
f.
Return to Question
15
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