6) Explain how tax revenue can be both an automatic iscal policy and a discretionary iscal
policy.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
7) “Discretionary iscal policy is a iscal action initiated by an act of the Federal Reserve,
while automatic iscal policy is a iscal action induced by the state of the economy.” Is the
previous statement correct or incorrect? Explain your answer.
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
8) “As the saying goes, the only sure things in life are death and taxes. This saying points
out the result that everything having to do with taxes is an automatic iscal policy.” Is the
preceding analysis correct or incorrect? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
69
9) Ignoring any supply-side efects, how does the magnitude of the government expenditure
multiplier compare to the magnitude of the tax multiplier? Explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
10) “As long as supply-side efects are ignored, the balanced budget multiplier is equal to
zero.” Is the previous statement correct or incorrect? Deine the balanced budget multiplier
and then explain your answer.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
70
11) Deine the balanced budget multiplier and explain how it works. In your answer, ignore
any supply-side efects.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
12) If the government increases expenditure by $40 billion and increases tax revenues by
$40 billion, what is the impact on aggregate demand? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
13) Which has a larger efect on aggregate demand: an increase in government
expenditure or an equal sized decrease in taxes? Explain your answer.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
71
14) To eliminate a recessionary gap, what iscal policy should the government pursue?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
15) What is the efect on aggregate demand and the AD curve from either an increase in
government expenditure or a cut in taxes?
Skill: Level 1: Deinition
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
16) An economy is experiencing a recession and policy makers are considering using
discretionary iscal policy to eliminate the recessionary gap. What are the four limitations
that policymakers face when using discretionary iscal policy? Briely discuss each.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
72
17) Explain four reasons why it is diicult to use discretionary iscal policy to eliminate a
delationary or inlationary gap.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
18) What are law-making lags? What efect do they have on the use of discretionary iscal
policy?
Skill: Level 2: Using deinitions
Section: Checkpoint 16.2
Status: Old
AACSB: Written and oral communication
19) Suppose there is a $200 billion recessionary gap. If there are no taxes or imports, to
restore the economy back to potential GDP, how much should government expenditure be
changed if the marginal propensity to consume is 0.75? Does government expenditure need
to be increased or decreased?
Skill: Level 4: Applying models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
73
20) Does the igure above illustrate a recessionary or an inlationary gap? What do
potential GDP and real GDP equal? What is an appropriate iscal policy to restore real GDP
to potential real GDP?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Status: Old
AACSB: Analytical thinking
16.8 Essay: The Supply Side: Potential GDP and Growth
1) Explain how an increase in government expenditure designed to increase aggregate
demand can increase potential GDP and aggregate supply.
Skill: Level 2: Using deinitions
Section: Checkpoint 16.3
Status: Old
AACSB: Written and oral communication
74
2) If the government raises taxes on labor income and interest income, explain how
potential GDP and economic growth are afected.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Status: Old
AACSB: Written and oral communication
3) Explain how a tax cut efects employment, labor productivity, and potential GDP.
Skill: Level 4: Applying models
Section: Checkpoint 16.3
Status: Old
AACSB: Written and oral communication
75