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Indicate the answer choice that best completes the statement or answers the question.
1. (4 Points) If the economy is in equilibrium above potential output, there is a(n) gap, and
scal policy is appropriate.
a) recessionary; expansionary
b) in ationary; expansionary
c) recessionary; contractionary
d) in ationary; contractionary
2. (4 Points) If policy makers want to increase real GDP by $100 billion, and the marginal propensity
to consume is 0.6, they should government purchases of goods and services by .
a) increase; $40 billion
b) increase; $60 billion
c) increase; $100 billion
d) decrease; $100 billion
ECON-1020H Assignment 3 1 / 12
ECON-1020H Assignment 3 April 04, 2022
3. (4 Points) The incomeexpenditure model predicts that if the marginal propensity to consume is
0.8, and the federal government decreases spending by $100 billion, real GDP will fall by:
a) $20 billion.
b) $200 billion.
c) $500 billion.
d) $1,000 billion.
4. (4 Points) An expansionary scal policy might increase aggregate demand by increasing:
a) government purchases.
b) the money supply.
c) interest rates.
d) taxes.
5. (4 Points) Examples of scal policy do NOT include:
a) increasing GST tax credit
b) reducing the money supply to raise the interest rate
c) increasing personal income tax deductions for home ownership
d) reducing federal subsidies to universities
