Question#2

Circle the correct answer to each question.

\f1D. 11. 12. 13. 14. 15. Assume that the economy is operating below its potential output. Government scal policy should be directed toward a(n): A) decrease in both government purchases and taxes B) decrease in government purchases andior tax increases C) increase in government purchases andfor tax cuts D) increase in both government purchases and taxes E) none of the above Assume that the economy is in the midst of a severe recession. Which of the following policies would be appropriate? A) a proposal to run a federal surplus B) a reduction in agricultural subsidies and veterans' benets C) a postponement of a highway construction program D) a reduction in federal tax rates on personal and corporate income E) an increase in the federal Goods and Services Tax (GST) An economy faces an inationary gap. Which of the following is the appropriate government scal policy? A) an increase in the federal Goods and Services Tax (GST) B) an increase in the size of income tax exemptions for each dependent C) the passage of legislation providing for the construction of 8000 new post ofce buildings D) an increase in soil conservation subsidies to farmers E) a reduction in the interest rate on bonds The multiplier effect means that: A) consumption is typically several times larger than withdrawals B) an increase in consumption can result in a larger increase in government purchases C) an increase in spending can cause aggregate demand to change by a larger amount D) a small decline in MP0 can cause aggregate demand to rise by several times that amount E) an increase in consumption leads to a larger increase in investment A reduction in taxes may: A) increase saving B) increase real output C) reduce unemployment D) increase consumption E) do all of the above According to the quantity theory of money, as accepted by Milton Friedman and other monetarists: A) the velocity of money is highly volatile B) real output can vary a great deal from its potential level C) inflation is usually caused by shifts in aggregate supply D) both the velocity of money and real output are fairly stable E) the money supply is usually constant