Download 26. (Figure: Fiscal Policy 1) Suppose that this economy is in

26. (Figure: Fiscal Policy 1) Suppose that this economy is in equilibrium at E1. If there is a
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decrease in taxes, then:
a) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP.
b) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real
GDP.
c) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.
d) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
(Figure: Fiscal Policy 1) Suppose that this economy is in equilibrium at E2. If there is an
increase in taxes, then:
a) AD2 will shift to the left, causing an increase in the price level and a decrease in real GDP.
b) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real
GDP.
c) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.
d) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
(Figure: Fiscal Policy 1) Suppose that this economy is in equilibrium at E2. If there is an
increase in government transfers, then:
a) AD2 will shift to the right, causing an increase in the price level and an increase in real GDP.
b) AD2 will shift to the left, causing a decrease in the price level and a decrease in the real
GDP.
c) AD1 will shift to the right, causing an increase in the price level and an increase in real GDP.
d) AD1 will shift to the right, causing a decrease in the price level and an increase in real GDP.
If the economy is at equilibrium above potential output:
a) there is a recessionary gap, and expansionary fiscal policy is appropriate.
b) there is an inflationary gap, and contractionary fiscal policy is appropriate.
c) there is a recessionary gap, and contractionary fiscal policy is appropriate.
d) there is an inflationary gap, and contractionary fiscal policy is appropriate.
Using the accompanying figure, which of the following would be the appropriate response on
the part of the North Placid government?
a)
b)
c)
d)
Increase government spending to close the recessionary gap.
Decrease government spending to close the recessionary gap.
Decrease taxes to close the inflationary gap.
Increase taxes to close the inflationary gap.
Answer Key - w8_L1_InfluenceFiscalPolicy_
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