Question

1. Suppose the federal government observes a decrease in net exports. Examine this event in terms of the aggregate demand and aggregate supply model.
A. The increase in gross investment will cause____.
B. This will lead to_____in the price level and____in real GDP.
C. ____fiscal policy will be used to_____.
D. The fiscal policy actions may include_____in taxes and/or____in government purchases.
E. The goal of fiscal policy is to_____.
2. Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model.
A. The decrease in net exports will cause_____.
B. This will lead to_____in the price level and_____in real GDP.
C. _____fiscal policy will be used to_____.
D. The fiscal policy actions may include_____in taxes and/or_____in government purchases.
3. In which instance would "crowding out" likely become a concern?
A. A balanced budget law prevents the government from taking fiscal action during a recession.
B. Prior-year budget surpluses allow the government to use saved funds to reduce taxes.
C. In order to increase spending on infrastructure, the federal government decides to borrow funds.
4. What becomes more difficult if "crowding out" occurs due to fiscal action?
A. Purchasing stocks and other financial investments.
B. Making economic investments.
C. Saving income for future purchases.

Answer 1

Answer:

1. a. The decrease in net exports will cause a decrease in aggregate demand.  

b. This will lead to a decrease in the price level and a decrease in real GDP.  

c. Expansionary fiscal policy will be used to reduce unemployment.  

 d. The fiscal policy actions may include a decrease in taxes and/or an increase in government purchases.  

 e. The goal of fiscal policy is to smooth out business cycles.

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2. a. The increase in gross investment will cause an increase in aggregate demand.  

b. This will lead to an increase in the price level an increase in real GDP.  

c. Contractionary fiscal policy will be used to reduce inflation..  

d. The fiscal policy actions may include an increase in taxes and/or a decrease in government purchases.  

e. The goal of fiscal policy is to smooth out business cycles.

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3. C. In order to increase spending on infrastructure, the federal government decides to borrow funds.

Crowding out occurs when the government borrows a significant amount of loanable funds such that interest rates rise and private firms are unable to afford the new rates so borrow less.

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4. B. Making economic investments.

With private firms unable to borrow much in a crowding out scenario, they will be unable to use those funds to invest in the economy.