1- Assume that a hypothetical economy with an MPC of 0.75 is experiencing severe recession.

Instructions: In part a, round your answers to 2 decimal places. Enter positive numbers. In part b, enter your answers as whole numbers.

a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? $ ___ billion.

How large a tax cut would be needed to achieve the same increase in aggregate demand? $ ___billion.

b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.

Increase spending by $ ____billion.

Increase taxes by $_______ billion.

2-

Real Output Demanded | Price Level | Real Output Supplied Billions |

506 | 110 | 513 |

508 | 105 | 512 |

510 | 100 | 510 |

512 | 95 | 507 |

514 | 90 | 502 |

Suppose that aggregate demand increases such that the amount of real output demanded rises by $7 billion at each price level.

**Instructions: **Enter your answers as whole numbers.

a. By what percentage will the price level increase? percent.

Will this inflation be demand-pull inflation or will it be cost-push inflation? (Click to select) Cost-push inflation Demand-pull inflation.

b. If potential real GDP (that is, full-employment GDP) is $510 billion, what will be the size of the positive GDP gap after the change in aggregate demand? $ billion.

c. If the government wants to use fiscal policy to counter the resulting inflation without changing tax rates, would it increase government spending or decrease it? (Click to select)Decrease Increase.

3 Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget deficit of $20 billion in year 3, a budget surplus of $10 billion in year 4, and a budget deficit of $2 billion in year 5.

a. What is the absolute size of its public debt in year 5?

**Instructions:** Enter your answer as a whole number. Do not include a plus or minus sign.

Public Debt = $ billion.

b. If its real GDP in year 5 is $104 billion, what is this country’s public debt as a percentage of real GDP in year 5?

**Instructions:** Round your answer to 2 decimal places.

Public Debt = percent.

4. Suppose that the investment demand curve in a certain economy is such that investment declines by $130 billion for every 1 percentage point increase in the real interest rate. Also, suppose that the investment demand curve shifts rightward by $150 billion at each real interest rate for every 1 percentage point increase in the expected rate of return from investment. If stimulus spending (an expansionary fiscal policy) by government increases the real interest rate by 2 percentage points, but also raises the expected rate of return on investment by 1 percentage point, how much investment, if any, will be crowded out?

**Instructions:** Enter your answer as a whole number.

$ billion.

5.

Government Expenditures, G | Tax Revenues T | Real GDP |

160 | 110 | 550 |

160 | 130 | 650 |

160 | 150 | 750 |

160 | 170 | 850 |

160 | 190 | 950 |

**Instructions:** Enter your answers as whole numbers.

a. What is the marginal tax rate in Waxwania?

percent.

b. What is the average tax rate?

percent.

c. Which of the following describes the tax system: proportional, progressive, regressive?

6.

Government Expenditures | Tax revenues | Real GDP |

190 | 110 | 550 |

190 | 130 | 650 |

190 | 150 | 750 |

190 | 170 | 850 |

190 | 190 | 950 |

**Instructions:** Enter your answers as whole numbers.

a. Waxwania is producing $650 of real GDP, whereas the potential real GDP (or full-employment real GDP) is $750. How large is its budget deficit?

$.

How large is its cyclically adjusted budget deficit?

$.

b. How large is its cyclically adjusted budget deficit as a percentage of potential real GDP?

**Instructions:** Round your answer to 2 decimal places.

Deficit = percent.

c. Is Waxwania’s fiscal policy expansionary or is it contractionary?

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