QUESTION 36 How might fiscal policy be used to correct an inflationary gap? O Th

Question

QUESTION 36 How might fiscal policy be used to correct an inflationary gap? O The exchange rate would be adjusted to encourage imports. O The interest rate would be adjusted to encourage saving. o The exchange rate would be adjusted to discourage imports Taxes would be increased to reduce aggregate demand. QUESTION 37 If the crowding-out effect is complete, then an increase in government spending of $100 bilion will generate how much more real GDP? Assume a marginal propensity to save of 0.25.) e $400 billion $25 billion $100 billion QUESTION 38 How does a government budget deficit occur? If a nation carries a public debt it must be running a deficit every year Save All A

Explanation / Answer

36. The right answer is option 4. Taxes would be increased to reduce aggregate demand.

Explanation: Inflationary pressure takes place when the real output is higher than the potential output. When taxes are increased, people have less disposable income to spend on goods and services and aggregate demand decreases. This shifts the AD curve towards the left and reduces inflationary pressure. Exchange rate or interest rates are not part of fiscal policy.

Fiscal policy is concerned with government income and expenses. So option 1,2, and 3 are invalid.

37. Option 1: $400 billion.

Explanation: Here, the spending multiplier = 1/MPS = 1/0.25 = 4

So, an increase in government spending by $100 billion will result in $100 * 4 = $400 billion increase in GDP.

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